Fitch Ratings believes single-family housing starts will increase 10% in 2012, while new home sales will rise 8%, according to the firm's latest U.S. homebuilding update.

Still, the ratings giant sees an erratic homebuilding market after witnessing disappointing results for 2011.

"Single-family housing finished well below expectations at the beginning of the year," Fitch said in its update. "Single-family starts fell 8.5%, while new home sales declined 5.9%. Existing home sales, meanwhile, improved 1.7%."

Despite challenges in the housing market and the expectation that home prices will remain soft, Fitch expects builders to fare better in 2012 with the market peppered with less competitive rent options and new home inventories at historic lows.

Fitch's outlook for homebuilders runs from stable to negative, with most builders rated as stable.  

The sector continues to face headwinds from a an anemic job market and what Fitch calls "negative buying psychology," where people are afraid to buy a home, fearing home prices are still vulnerable to decline.

Going forward, Fitch believes public homebuilding firms will add selectively to their developed lot holdings while committing resources to partially or undeveloped land.

"The still irregular flow of appropriately priced land from banks and other sources tends to support this strategy," Fitch said. "However, if the operating environment becomes more challenged. Fitch expects builders will be more cautious as to land purchase and will preserve cash."