Betting on a housing recovery

ROAD TO RESCUE

• Home prices up for 1st time in 3 years
• New home sales: 'Really good news'
• Wall Street: Here comes the hard part
• 7 regional banks fail
• Banker: "TARP helped avert a global calamity"

Stocks have been rallying for the past few weeks. But homebuilders have done even better than the broader market.

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NEW YORK (CNNMoney.com) -- Has the housing market finally hit bottom? It's probably too soon to say -- but Wall Street sure seems to think so.

The Commerce Department reported Wednesday that new-home sales rose almost 5% last month after hitting their lowest point ever in January. Economists were expecting a decline of about 3%

This comes on the heels of two reports showing a better-than-expected gain in existing-home sales and the first increase in construction of new homes since June.

Investors have taken notice. The SPDR S&P Homebuilders (XHB) exchange-traded fund spiked about 8% higher Wednesday morning. The ETF includes several leading homebuilders, as well as companies with strong ties to the housing market like Home Depot (HD, Fortune 500) and Lowe's (LOW, Fortune 500) and paint maker Sherwin Williams (SHW, Fortune 500).

Over the past two and a half weeks, a period when the entire market has surged, the homebuilders ETF has been one of the big leaders -- it is up more than 40% compared to about 20% for the S&P 500.

In fact, even though the broader stock market is still down sharply this year, several homebuilding stocks are actually in the black, including D.R. Horton (DHI, Fortune 500), Lennar (LEN, Fortune 500) and Pulte Homes (PHM, Fortune 500).

Now what does all this mean? Are savvy investors declaring that the worst is over for housing and that it's time to start plowing back into homebuilders? Perhaps. Still, it's hard to get overly excited about the recent housing data.

Investors have to be cautious.

Even though some of the February numbers suggest that the that the credit markets may be finally thawing after the Lehman Brothers collapse-induced freeze, many experts warn that isn't the same thing as a healthy housing market -- especially since home prices continue to fall.

In addition, the unemployment rate has risen sharply in the past few months and many economists expect that trend to continue.

So even though mortgage rates have been falling and banks may be more willing to lend now that the Treasury Department has a plan to help them unload some of their most troubled assets, that may not be enough to counter the growing ranks of unemployed who can't buy under any circumstances.

Nonetheless, one fund manager who owns several homebuilder stocks said that even though it's premature to predict a housing recovery, the group has been beaten down so far that it won't take a significant real estate upturn for more share-price gains.

"One month does not a trend make. We're hopefully bouncing along the bottom but happy days are not here again," said John Buckingham, manager of the Al Frank fund. "Still, many of the stocks have been priced for the Great Depression 2. Lots of homebuilders have been generating cash during the downturn and their balance sheets, believe it or not, are in good shape."

Buckingham said he's a little concerned by the sharp recent run-up in the stocks. But he said he still likes shares of several of the larger builders, including MDC Holdings (MDC), Ryland (RYL), D.R. Horton and KB Home (KBH, Fortune 500), for the long-term.

At the end of the day, stabilization in the market is what is needed before a recovery. It's the classic case of learning to crawl before you can walk, let alone run.

Buckingham said that as long as the housing numbers are "getting less worse" that should be treated as encouraging news by investors. He added that even though some may dismiss February's surprising sales strength as a byproduct of more demand for foreclosed homes, any boost to sales is a good sign.

"Clearly there is interest in homes. Whether it's in foreclosure or not, there's still a buyer. That helps put in a floor on prices and could boost confidence," he said.

Another investor in several housing-related stocks agreed that the housing picture looks less bleak. But he added that investors will need to be patient. Just as the housing market didn't collapse overnight, a rebound won't take place quickly either.

"It's exciting that the numbers are perking up and the government's efforts to bring mortgage rates down are helping," said Doug Ober, chairman and CEO of Adams Express (ADX), a closed-end fund that invests mainly in U.S. stocks and owns Ryland, Lowe's and cabinet and plumbing fixtures maker Masco (MAS, Fortune 500). "But I think that probably the market is a little early on this. This is going to be a recovery that will take several years."

Shameless plug alert: Before I started writing The Buzz, I covered the media business for several years at CNNMoney.com. Some of this reporting is the basis of a book I've written about News Corp. CEO Rupert Murdoch called Inside Rupert's Brain, which was published on March 19 by Portfolio, an imprint of Penguin Group (USA).