Builders' stocks rise as home sales fall

The news from the housing market keeps getting worse, but you wouldn't know it by looking at home-builders' stocks.

Shares of home builders gained Wednesday, continuing a head-turning performance this year. Even housing pessimists can't overlook a recent run that has:

•Pushed the Standard & Poor's mhp home-building index up 24.6% this year, making it the top-performing industry in 2008.

•Created huge individual winners. Three of the five best gainers in the S&P 500 this year are home builders: Pulte, phm at No. 1, is up 51%; D.R. Horton, dhi at No. 3, has gained 30%; and No. 5 KB Home kbh is up 26%.

•Defied bad news. Wednesday, for instance, the government reported sales of new single-family homes in the country fell to a 13-year low. Meanwhile, Toll Bros., tol a builder of high-end homes, reported a quarterly loss of $96 million on 23% lower revenue.

But that didn't faze the stocks. Toll shares rose 71 cents, or 3.1%, to $23.83. The iShares Dow Jones U.S. Home Construction exchange-traded fund, which tracks the industry, rose 1.4%, while the broad S&P 500 index fell 0.1% to 1380.

Housing has been one of Wall Street's concerns.

If the recovery in building stocks proves more than a short-term rally off depressed levels, analysts say it could bolster confidence in the broad market.

"It seems investors are starting to look ahead to see things will pick up (in housing) in the second half" of 2008, says Paul Hickey, co-founder of Bespoke Investment Group.

The optimists are betting the Federal Reserve's five-consecutive cuts to short-term interest rates since last September, and hints more may be on the way, will help the housing market stabilize, Hickey says.

Wednesday, regulators also authorized Fannie Mae fnm and Freddie Mac, fre the biggest funders of mortgages, to buy more home loans.

But while some investors desperately want home-building stocks to bounce back, there are plenty of skeptics who say it's a mirage.

The 1,400% run-up in home-building stocks from 2000 to 2005 and subsequent 80% crash was nearly identical to the rise in dot-com stocks from 1995 to 2000 before the bubble burst, says James Stack of InvesTech Research.

Technology stocks rallied many times before finally bottoming in 2002, which Stack also expects with home-builders' shares. That's not to mention the big stockpile of unsold homes. "I'm skeptical we've hit bottom," he says.

In addition, it's unlikely for a former bubble industry, this time housing, to lead the market for a sustainable period this soon, says Bryan Sadoff of Sadoff Investment Management.

And that's why investors such as Ronald Muhlenkamp, portfolio manager of Muhlenkamp & Co., muhlx still don't trust the rally. "We're waiting and seeing," he says.