(FORTUNE Magazine) – When you think about sexy investments, chances are homebuilding stocks don't jump to mind. At a time when companies are revolutionizing the way we interact through technology and developing miracle cures for previously untreatable diseases, firms that construct homes with old-fashioned tools such as hammers and nails seem, well, dull.

Unless you like making money. Big builders, as measured by the 14 stocks in Standard & Poor's supercomposite homebuilding index, have surged 370% in the past four years. It's not as though they did well only as a defensive play during the bear market, either. Stocks of all stripes have rallied in the last year--the Dow is up 35%, the Nasdaq some 50%. Yet the builders are leading the way, rising 80% in the same period.

The reasons for the surge will sound familiar to anyone who has ever shopped for a home. With interest rates hovering at their lowest levels in four decades, homeownership rose to its highest level ever last year, at 68%. The huge demand for homes has translated into record sales and profits for homebuilders.

Can the run go on? With rates expected to rise, bears say that the torrid pace of new-home sales will slow. Meanwhile, rising prices for land and lumber threaten to eat into profit margins. Some investors are concluding that the good times for homebuilders are ending.

No doubt, a slowdown is on the horizon. The National Association of Home Builders projects that new-home sales will fall 3% in 2004, to 1.05 million units. That's based largely on the view that the Federal Reserve will raise the federal-funds interest rate later this year.

Nevertheless, a slight uptick in rates isn't going to derail the housing boom. Population growth, in part fueled by immigration, will continue to drive demand for new homes. Plus, environmental restrictions, zoning regulations, and "not in my backyard" attitudes all contribute to a tight supply of land.

Besides, consolidation is likely to continue fueling much of the strong earnings growth. Twenty years ago, says Ken Heebner, manager of the CGM Realty fund, homebuilding was run by "mom-and-pop shops." Today publicly traded builders control 20% of the market, up from 10% a decade ago. Heebner, whose fund has a five-year average return of 25%, expects their market share to rise to more than 50% over the next several years.

Best of all, the stocks are still cheap. Value investor Ron Muhlenkamp first bought a half-dozen homebuilding stocks four years ago, when they traded for about four times earnings. They now sell for eight times earnings--and he still likes them. "If you brought us fresh money today, we'd buy them," he says.

One strategy is to hedge against the possibility of rising rates by picking companies that focus on the luxury market; buying decisions for their customers are less affected by lending rates. The nation's leading seller of luxury homes is Toll Brothers (TOL, $47). Chairman and CEO Bob Toll quips that the threat of rising rates is "more cocktail party talk" than a concern for his customers. And his confidence is backed up by the numbers. The company targets affluent baby-boomers by selling homes with an average price of more than $500,000, twice the industry average.

Toll Brothers has grown well beyond its Philadelphia roots and expanded into fast-growing markets in California, Arizona, Texas, and Florida by focusing on a clever but simple strategy: It builds near major cities and sells to "move up" buyers and empty-nesters with snazzy model homes that have a range of options. The stock trades for just eight times estimated earnings for fiscal 2005.

Another smart way to invest is to pick a consolidator, such as Lennar (LEN, $53). With annual sales of more than 30,000 homes in 13 states, it's one of the biggest builders in the U.S. The company has expanded rapidly, particularly in the past few years. Led by the May 2000 acquisition of U.S. Home, Lennar has snapped up about 20 smaller builders in the past five years. That's helped drive earnings per share up well over 30% a year during that period.

The company also has one of the healthiest balance sheets in the industry. In its most recent fiscal year, Lennar reduced its debt-to-total-capital ratio to 32%, from 42%, and raised its cash on hand to $1.2 billion, from $730 million. These steps free up capital to make more acquisitions, something CEO Stuart Miller says he intends to pursue. Lennar too trades for just eight times earnings despite strong projected profit growth.

Finally, there's industry gorilla D.R. Horton (DHI, $34). Since its start in 1978, the company has expanded from its Dallas--Fort Worth base into more than 20 states by making sound acquisitions. Following its recent purchase of Schuler Homes, D.R. Horton is now the largest company in the industry, with more than 37,000 homes sold in the past 12 months. Its increased girth gives it more leverage to negotiate favorable deals with suppliers and subcontractors. The company saved $2,600 per home in its latest fiscal year, up from $2,200 per home in the prior period. The stock sells for nine times fiscal 2005 earnings projections. And given its huge $3.6 billion backlog, D.R. Horton has a solid foundation to build on.