NEW YORK (

TheStreet

) -- Stocks in the homebuilder sector were mostly in positive territory Wednesday, riding an overall market upswing that saw the

Dow Jones industrial average surge well over 200 points

.

Brookfield Homes

( BHS) and

Beazer Homes

(BZH) - Get Report

may be leading the group in terms of share price gains for the day, rising 10.3% and 4.6%, respectively, but savvy investors should consider

Ryland

(RYL)

and

KB Home

(KBH) - Get Report

.

Ryland and KB Home are the top homebuilder stock picks of Stifel Nicolaus analyst Michael R. Widner. The analyst told

TheStreet

that these two outpace sector peers on both a price-to-book and normalized earnings basis, and both should work as long term value plays.

Widner conceded the housing market is in for a long and slow recovery period, and that ultimately, a

sustainable pace of new-home sales

is at least double where we are now.

"Based on that level of potential demand, if it takes three or four years to get there and we assume normal cycle-average profit margins, these are the stocks that should be worth two to three times what they're trading at today three years from now," he said.

Ryland shares gained 2.7% Wednesday afternoon to $16.54, while KB Home shares jumped 4.9% to $10.81.

The homebuilder group tends to form bottoms around adjusted book value, Widner said, and that's where Ryland and KB Home have been recently, trading around their 52-week lows. He doesn't think price-to-book is a particularly useful measure for the homebuilding sector, but understands that the market seems to think it is.

Based on generally depressed share prices, Widner said investors already priced in the sector's gloomy outlook.

Data released last month showed

new-home sales fell 12.4% in July

to a record-low rate, while

existing-home sales plummeted 27.2%

in the month. Both sets of data came in far worse than expected.

Such dismal news creates opportunities for contrarian investors willing to go against group sentiment. Ryland and KB Home are deep value plays for Widner, not just catching the bottom of the trade.

"Because

homebuilders are such a volatile group, here is an opportunity to buy at what has proven to be the bottom of the trading range," he said. "If you buy and it takes 3 years to double your money, we're OK with that; you could also be up 20% in 6 weeks and perhaps take that as an opportunity to get out. In any case, for trading opportunities and longer term deep value,

Ryland and KB Home hold the most appeal for us."

Widner doesn't have a sell rating on any stocks in the homebuilding sector and is admittedly "fairly bearish on the sector," but upgraded shares of

D.R. Horton

(DHI) - Get Report

,

PulteGroup

(PHM) - Get Report

and

M.D.C. Holdings

(MDC) - Get Report

from sell to hold in June.

His buy rating on Ryland KB Home marks the first time he's had buy ratings on any homebuilder stock for several years.

The housing market has been under tremendous pressure for some time, and demand fell further after the springtime

expiration of federal tax credits for homebuyers

. Most analysts agree the situation is likely to get worse before it gets better.

>>4 Top Homebuilder Stocks: Life After the Tax Credit

The housing market saw sales ramp up in March and April as consumers rushed to take advantage of tax credits that offered as much as $8,000 for first-time homebuyers and $6,500 for repeat buyers. Following the expiration of those credits on April 30, the market saw a dramatic decline in demand for the month of May that spilled over into June. Data for July showed a further drop in demand. Lawmakers later extended the deadline to close on a home purchase and still qualify for the tax credit to Sept. 30.

-- Written by Miriam Marcus Reimer in New York.

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.

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RELATED STORIES:

>>Home Prices Rise 4.4% in June

>>Toll Brothers Gains on Return to Profits

>>D.R. Horton to Outpace Homebuilder Peers

>>Mortgage Applications Rise on Refi

>>Existing-Home Sales: Winners & Losers

>>We Need Another Homebuyer Tax Credit, Poll Says

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