Those betting against another rally in the housing sector this year should brace for more pain.

With home sales expected to hit a record in 2004, according to Fannie Mae ( FNM), and interest rates projected to remain low for much of the year, the environment for housing stocks still looks good.

"I think the homebuilding business is as strong as it's been any time in the last three or four years," said Ken Heebner, manager of the CGM Realty fund. "The industry at the moment has everything going for it."

Housing stocks surged 63% on average last year, as a record 1.09 million new homes were sold. Although economists had expected a slight falloff in sales this year, Fannie Mae now believes another record is possible, thanks to persistently low interest rates.

Economists aren't expecting a change in interest rates Tuesday and most say any change in the Fed's policy statement will be extremely subtle. Asha Bangalore, an economist at Northern Trust, said the central bank might say that the risks of disinflation are now equal to the risks of inflation.

In the last statement, the Fed said the odds of a welcome fall in inflation are almost equal to that of a rise in inflation. "It's going to be minor," she said, adding that she doesn't expect a rate hike until sometime in 2005.

The national average interest rate on a 30-year fixed mortgage recently fell to 5.41%, its lowest level since July, as expectations for an interest rate hike by the Federal Reserve were pushed out following a much-weaker-than-expected jobs report for February.

In recent weeks, numerous companies have been raising earnings guidance and reporting extremely strong order growth. Toll Brothers ( TOL) said it expects full-year earnings to rise 20% over 2003 levels, making it another record year for the firm. D.R. Horton ( DHI) and Hovnanian Enterprises ( HOV) have both raised their earnings forecasts for 2004 and Centex ( CTX) recently said orders rose 21% for the first eight weeks of the fourth quarter.

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