(FORTUNE Magazine) – For five years you've been kicking yourself: Why did you pass on the chance to buy that Victorian in Montclair, N.J.--or perhaps the colonial in Oak Park, Ill.--that's since appreciated 102%? There's no going back in time, but you can still make some money on real estate--by investing in the stock market. Thanks to the lowest mortgage rates in history, homebuilding and other housing-related stocks could be among the biggest winners of the next year.

We know what you're thinking: This is a nutty idea. Wasn't the housing market supposed to collapse? Indeed, not so very long ago fear that housing prices were soaring out of proportion to incomes and rents led many to predict that a correction was at hand. A major business publication remarkably similar to the one you are holding in your hands ran a cover illustration showing a tony house teetering on the edge of an infinite cliff. The cover line: IS REAL ESTATE NEXT?

But Alan Greenspan and his pals at the Federal Reserve have allayed the fears of American home sellers, builders, brokers, and mortgage bankers for the time being. At its May meeting the Fed signaled that it was more concerned about deflation than inflation. So although the funds rate, at 1.25%, is at a 40-year low, the Fed hinted that it doesn't plan to pull the trigger by raising rates until it sees the whites of inflation's eyes. That probably won't happen until well after the economy is growing briskly again.

The effect on housing was swift and remarkable: Because the Fed is unlikely to raise rates soon, financial institutions see little risk in owning mortgage debt. As a result, the average rate on a 30-year mortgage has fallen to a new all-time low of 5.3%, pulling the country into yet another mortgage boom. The Mortgage Bankers Association now forecasts that $3.02 trillion in loans will be written this year, up from $2.48 trillion last year, and that 2003 will post a new record for homes sold. "I foresee a speculative rise in home prices and a speculative move in housing stocks," says Doug Kass, head of the Florida-based hedge fund Seabreeze Partners. "The homebuilders are going to be the market leaders on the upside in late 2003 and 2004."

The low rates mean more folks will be refinancing their mortgages too. In fact, the Mortgage Bankers Association's refinance index is back near all-time highs. That's going to help a slew of housing-related companies. The Fed reckons that homeowners extracted some $54.5 billion in cash from their homes during the refi boom of 1998 and early 1999. About 18% of that money went for consumer goods, and a third went right back into homes to fix roofs, add porches, and lay new foundations. Today people may be more nervous about using their homes as piggy banks, so fewer borrowers will opt to take extra cash when they refinance, says Lehman Brothers chief economist Ethan Harris. But those who do are more likely to put the money into fixing up the house, which is seen as a store of value, rather than into more ephemeral pleasures like SUVs and spa vacations.

In fact, Richard Manoogian, head of building-supply company Masco, sees more of his customers renovating kitchen and bathrooms, which are perceived as good ways to boost a house's value. They are also buying higher-priced products--the maple, not the knotty pine.

So how does the continued strength of the housing market translate into a Wall Street investment? Before we get to the sector's stocks, here are two big caveats: First, these are not stocks to stick in your portfolio and forget; they are opportunistic buys. Housing has shown incredible resilience, but it hasn't been liberated from economic cycles. So invest in this sector only if you are willing to take some risk and watch your position carefully. The second warning is for homeowners. If your house is your biggest asset, as it is for most Americans, you've already invested heavily in the real estate sector. In that case, buying housing stocks is a bit like buying oil stocks and Houston office property in the early 1980s, or working in Silicon Valley and loading up on dot-coms in the late 1990s. Betting everything on one sector or trend is always dangerous.

That said, here are four ways to get the most out of the real estate boom now.

Homebuilders

Over the past five years homebuilding has become a safer investment. Smaller builders have gone out of business, allowing the top ten builders to double their market share to 15%. That trend has led to less volatility, says Smith Barney analyst Stephen Kim. In the past small builders often drove the industry into manic ups and downs. In fat times they would overextend themselves; in the lean they'd rush for the exits.

Big public builders--Toll, Pulte, Centex, KB Home, Lennar, Beazer Homes--can weather the bad times better and, just as important, control themselves during a boom. That self-control is one reason the new-home market is in such good shape. The biggest danger to the housing market, aside from higher interest rates, according to Kass, is overbuilding. But, he says, "inventory has been contained--it's nowhere near the level where you need to be concerned."

In fact, inventories of speculatively built homes--those with no buyers in the wings--look low if you consider how quickly houses are being sold. Since 1997 it's taken between 32 and four months of sales to fill new homes. In contrast, in the 1980s through the mid-1990s it took between five and 62 months of sales to clear out inventory. "There's a lot more discipline in the industry than in years gone by. None of the public builders want inventory," says Beazer CEO Ian McCarthy. "We feel we're underbuilding for the market."

There are now nearly 300,000 empty houses built on spec. That number was considered dangerously high in the past. But Kim believes it's not so scary anymore. Ten years ago about 40% of homes were built by owners; today just 23% are. Because it is harder to build a home of one's own, speculative houses sell more easily.

A bigger concern for investors thinking of getting in on homebuilders today is that the stocks have been getting more expensive as interest rates have dropped. Toll Brothers has jumped 41% this year, KB Home is up 41%, Pulte is up 37%. You get the picture. Many professional investors who got in early (Kass, for example) have already cashed in on the easy gains.

Even so, many of the stocks still look undervalued. Toll Brothers (TOL, $28.50), which does about half its business in Northeast and Mid-Atlantic states and sells mostly luxury homes, has a price/earnings ratio of 9.6, even though it has had average annual earnings growth over the past five years of 27%. With a P/E of 7.5 and earnings growth of 38%, Beazer Homes (BZH, $83.44) is cheaper still. The Atlanta company sells moderately priced homes (they average about $190,000) and--soothingly for the fretful--doesn't build in the heady markets of Boston, the Bay Area, Portland, Ore., or New York.

There are reasons, of course, that homebuilders trade at valuations much lower than that of the broad market. For one thing, they are prone to the ups and downs of the economy. For another, they create their own competition. The house they sell today may go on the market again in a few years. And a ten-year-old house doesn't lose value like a ten-year-old car. But given that builders are managing their inventories and smoothing out the bumpy booms and busts, the stocks can probably trade at moderately higher valuations than they do now, says Brad Ruderman, managing partner at the hedge fund Ruderman Capital Partners. (Ruderman got in, and out, of the stocks earlier this year.)

Supplies

Building-supply companies are hoping that the latest round of mortgage refinancings translates into lots of shiny new chrome in bathrooms across America. The biggest problem domestic suppliers like Black & Decker and Stanley Works face is tough competition from overseas, which is why we don't recommend that you run out and buy their stocks. "In most cases domestically based building-product companies are not the low-cost producer," says Smith Barney's Kim. "And it's come to the point where the difference in quality between American-made and China-made is not that great. I would always buy a homebuilder first."

One domestic supplier that bucks the trend is Masco (MAS, $25). Based in Taylor, Mich., Masco specializes in product lines, such as cabinets and paint, that have little import competition. (It's expensive to ship paint, for instance, long distances.) Moreover, through its fast-growing installation division, it has created relationships with builders. The company says it does work in about 60% of all single-family homes being built in the country, allowing it to participate in the housing boom quite literally on the ground level. Finally, its P/E of 16.1 falls well below the 19 or so it has averaged over the past decade.

Retailers

Both Home Depot and Lowe's, the biggest and best-known building-supply stores, carry steep valuations. It seems that investors have come to believe that both stores will continue to grow no matter what. Economy stays stuck? No problem. The Fed will keep rates low, which encourages refinancing, and that leads to home improvement. Economy revives? Consumers will flock to the stores to make all those improvements they'd been putting off. Given this heads-they-win-tails-they-win view, it will be hard for the companies to offer much of an upside surprise.

Still, the expected new wave of refinancings should translate, at least in the short term, into more sales and higher earnings at both big-box retailers. Lowe's, which has been coming up fast on its larger rival, is widely believed to be the better-run company. Home Depot (HD, $32), however, may be the better stock buy right now because of its turnaround potential.

CEO Bob Nardelli, who came to Home Depot from General Electric in late 2000, seems to be reversing mistakes he made early on. Some of his cost-cutting measures, such as reducing the number of products and shifting from well-informed full-time employees to part-timers who often didn't have handyman know-how, turned off customers. The stock suffered, and began to trade at a significantly lower valuation than Lowe's. "Employee morale was down, the stores were looking sloppy, and they had a lot of stuff out of stock," says Brett Gallagher, head of U.S. equities at Julius Baer.

Now the company is putting more full-time staff back in stores and restocking shelves. In the quarter that ended May 4, sales and earnings were up 6%, and same-store sales declined less than analysts had expected. Management changes prompted Gallagher to swap out of a position in Lowe's to one in Home Depot earlier this year. Other investors have lately caught on, but Home Depot, with a P/E of 20, still trades at a bit of a discount to Lowe's multiple of 21.2.

That said, both chains are huge, and as they build more stores, they risk saturating the market. We have to assume there's a limit to the number of downspouts, Pergo floors, and porcelain basins America can absorb. It's just that, with Greenspan on the watch, we haven't hit it yet.