Recovery Watch: Homebuilders Seasaw

NEW YORK(TheStreet) -- Like the housing recovery, homebuilder stocks are on a bit of a rollercoaster.

Shares of the sector are in the red Monday afternoon, after rallying the end of of last week, as investors fear the housing turnaround won't be fast and immediate.

Lennar(LEN Quote) reported a bigger-than-expected loss in its third quarter on Monday, and during a conference call Standard & Poor's Rating Services said there outlook for the sector is still predominantly negative.

As a result, shares of Lennar fell 3% to $16.02, KB Home(KBH Quote) was off 2% to $19.74, Pulte Homes(PHM Quote) dropped 1% to $12.54, and Toll Brothers(TOL Quote) fell 2% to $21.83.

Wall Street is also fearful of the looming end of the $8,000 tax break for new home owners, which is set to expire in November. Some analysts believe the rebate has artificially inflated growth in the sector, and that the recovery will come to an abrupt stop once it expires.

But this pessimism from the market follows on the heels of some good news within the sector.

Last week, J.P. Morgan turned positive on the housing market. Analyst Michael Rehaut said while the housing recovery will most certainly not walk a straight path over the coming years, the sector will continue to recover and drive further upside to the current rally in homebuilder stocks.

Rehaut says supply appears to be more manageable, while demand has begun to stabilize and even slowly re-emerge. "In such an environment, we believe the builders will once again demonstrate positive order growth -- historically a powerful positive catalyst -- and home-price declines will near their end, resulting in the abatement of impairment charges," he wrote in a note.

As a result, Rehaut upgraded Toll Brothers and KB Home to overweight. He already had an overweight rating on Lennar.