Warning to investors in the housing sector: When house parties get overcrowded, that's usually right before things turn ugly.

The relentless, bear-defying strength of the homebuilding stocks -- the Dow Jones Home Construction Index is up 192% over the past two and a half years -- has attracted a lot of recent attention, and cash, from mutual fund managers.

But the latecomers may be chasing performance, getting into a white-hot sector just before it cools. While many skippers say the companies remain good values, others say the sector's earnings are at a peak, and stocks have nowhere to go but down.

In the first quarter of 1999, homebuilders were wallflowers to most managers, who were loading up on technology. For instance, just 27 funds owned positions in

Beazer Homes

(BZH) - Get Report

. Today, 121 own a stake in the builder.

And over the past quarter the number of buyers has surged, according to data compiled by mutual-fund tracker Morningstar for

TheStreet.com

. From the second quarter to the third quarter, the number of funds that owned

Lennar

(LEN) - Get Report

increased 34%, while ownership in

KB Homes

(KBH) - Get Report

and Beazer increased 24% and 29%, respectively.

Beazer Boom
The number of funds owning the homebuilder's stock has soared, while its P/E has remained fairly steady

Source: Morningstar, Bloomberg

Centex Rising
Mutual-fund ownership in Centex has surged as well

Source: Morningstar, Bloomberg

KB Home
Funds have piled into this homebuilder

Source: Morningstar, Bloomberg

Lennar
Lennar has gained many fund skippers' favor as well.

Source: Morningstar, Bloomberg

Passion for Pulte
The big homebuilder turns up in a growing number of portfolios these days

Source: Morningstar, Bloomberg

"Homebuilding is one of the few sectors that have worked over the last two years. The single-digit price-to-earnings multiples look attractive at first blush. So I'm not surprised fund managers are pouring in," says Todd Voigt, senior analyst at Cliffwood Partners, a Los Angeles real estate investment firm that has been short-selling several homebuilders. "But we feel they are at the peak of their earnings cycle, so we are very bearish about valuations."

One prominent Wall Street bull who disagrees is Ken Heebner, manager of the

(NEFGX)

CDC Nvest Targeted Equity Fund, which places its eggs into as few baskets as possible. According to Morningstar, his fund has more than a quarter of its assets in just four homebuilders.

"It stands out to me as the most attractive sector in the market. In a nutshell, you have a major industry in this country that is trading at six plus times 2003 earnings," he said. "And those are growing by more than 20% annually, depending on the company."

Heebner's view: The homebuilders have revolutionized their business over the last decade, consolidating operations, diversifying land portfolios and creating better access to capital, while softening the boom-bust cycle that plagued the industry for years.

The

(MFOCX) - Get Report

Marsico Focus fund, which tends to invest heavily in a few select areas, recently added 491,000 shares, boosting its position in Lennar to 2.1% of total assets, according to Morningstar. Fidelity, Bear Stearns and Morgan Stanley all added to their positions in Lennar. No matter what kind of fund, be it growth, value or blend, they've all been buyers.

From the looks of it, funds aren't in a rush to get out. Only 38 mutual funds sold Lennar's stock as of September.

According to a report from Bank of America Securities, the top seven builders had 3.4% of the market share in 1989, with a debt-to-capital ratio of 73.8%, a level on par with the airline industry.

Today, they account for 14.3% of the market, with a debt-to-cap ratio of just 47.8%. And earnings are growing fast.

Just like in 1999, when technology stocks were immune to the vagaries of the business cycle, the bulls believe the homeowners now defy their once-cyclical nature.

"Investors should ignore the conventional wisdom that homebuilders are cyclicals that should only be bought early in a recovery when P/E ratios are high and sold when earnings catch up with stock prices," said Carl Reichardt, an analyst with Bank of America Securities, in a research report last Wednesday.

But not everyone is convinced.

"The problem with that kind of reasoning is there's always a grain of truth to it and empirical evidence to back it up," said Anirvan Banerji, director of research at the Economic Cycle Research Institute. "And this apparently clear-cut evidence seems to add up to the thesis that cyclicality has been eliminated, when really, it was just dumb luck that put them in this position."

Can Janus Grow Beyond Growth?
The fund shop's newest initiatives focus on value -- but the new funds may not deserve your money.

Respect Your Elders -- They Make Better Fund Skippers
A Morningstar survey found experience counts when running a fund.

Pitt and the Portfolio: Dagen Helps Harvey With Fund Picks
The embattled SEC chairman has made a few missteps -- in his investment planning.

Banerji contends that faulty projections, not sound management, largely explain why builders have uncharacteristically outperformed during the recession.

"Homebuilders are crediting themselves with not overbuilding, saying they learned from the mistakes of 1980s, but this was a fluke from misreading the census," said Banerji. "In the late 1990s, builders and industry forecasters said we'd see a trailing off in housing demand in the early 2000s. But when the 2000 census came out, there was a major surprise in the number of immigrant families buying homes, and the demand for homes caught them by surprise."

And some bears say the companies, now facing rising prices for land, are seeing their lucky streak drawing to a close.

"They've pulled forward a couple years of demand and they have sold all of their cheap land," Voigt says. "Margins in the future are going to be under pressure."

If Voigt and other shorts are wrong, they are likely to feel a lot more pain in the coming year. If they are right, and lot of fund managers -- and fund investors -- will be on the hook.