NEW YORK (MONEY Magazine) - Improved business practices make builders a buy. Risk: A fast rise in interest rates.

Buying housing stocks today is like buying dot-coms in January 2000, right? Well, no.

"The media has been hung up on this [real estate] bubble idea," says Ron Muhlenkamp, manager of the Muhlenkamp Fund. "I'll start worrying when the media starts saying housing prices will go up forever."

Muhlenkamp, mind you, is no patsy for the housing industry. In 1987, the veteran value investor penned an essay titled "Wake up America -- Houses Don't Make You Money." But today, home builders Centex and NVR are among Muhlenkamp's biggest holdings.

So what's changed since the 1980s? A lot. Rates on 30-year mortgages are 5.7 percent today vs. nearly 10 percent in the late 1980s. The typical homeowner allocates a smaller share of his income to mortgage payments today than he did in 1980, 1990 or even 2000.

Yes, rates are expected to rise, but for home builders a gradual increase should be offset by a couple of other underappreciated factors.

First, there are the aging baby boomers -- folks 55 and older boast the highest home ownership rates. Second, home builders have gotten better at pacing themselves. Fifteen years ago, overzealous builders put up more houses in California, New York and New England than those frothy markets could absorb. Today there's a mere four-months' supply, nearly a 35-year low.

The big risk, of course, is that interest-rate increases don't turn out to be gradual at all. That could trigger a sharp drop in demand for new houses.

But after two years of big gains, housing stocks still look cheap enough to make that a risk worth taking. Despite analyst estimates of 16 percent earnings growth for the group in 2005, builders trade at an average P/E of just 7. That makes housing the stock market's cheapest sector, as measured by both price-to-earnings and the ratio of that P/E to growth rates.

The simplest way to tap this value play is through CGM Realty, a concentrated real estate fund that has lately been heavy on builders. (Muhlenkamp's excellent fund is too diversified if you want a straight play on the sector.)

If individual stocks are your game, any one of the big builders -- D.R. Horton (Research), Lennar (Research), Pulte Homes (Research), Centex (Research) -- are worth a look. Even if real estate does cool off, their deep pockets will allow them to keep grabbing market share from contractors and private developers who still control the bulk of a very fragmented industry.

Our pick of the bunch, though, is Centex. Its commercial construction business provides some buffer should higher mortgage rates soften the residential business.

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