If the housing market slows down, how will the homebuilders grow? The bulls say through acquisitions, but that makes the sector's future growth a lot less clear for investors.

The bulls' argument is that even if the housing market is set to slow down -- which certainly looks to be the case -- then public builders can use their lower cost of capital to muscle out the competition and buy whatever good private builders they can't force out of business.

It's a compelling proposition. Most private builders, beyond the very large ones, rely on higher-cost variable-rate bank financing, in which loans often are secured against individual plots of land. Large public builders, on the other hand, can issue multiyear, fixed-rate debt and pay lower, investment-grade rates.

"If the market is viewed to be topping out in a bear sense, then some of the private players will say, 'I can't compete. I'm going to sell out now,'" says Sam Lieber, portfolio manager of the ( EUEYX) Alpine US Real Estate fund. "Ultimately, that's the Wal-Mart ( WMT) story. You take the competition out."

However, even if the argument has some validity, the risk is that Wall Street might not care.

"Personally, I think that if the Street really thought (builders') order growth was mostly coming from consolidation, they would kill these stocks," says James Poyner, an analyst with Palladian Research. "Growth through acquisition in any industry will generally give you a lower multiple," since most acquisitions don't go that smoothly, he says.

More and more, investors appear to be getting nervous about builders' guidance for 2006 and 2007. The sector got hammered last week after Federal Reserve officials hinted several times that the Fed would continue raising interest rates. Two of the industry's darlings, Toll Brothers ( TOL) and Pulte Homes ( PHM), each fell more than 10% last week. William Lyon Homes ( WLS) shed 15% for the week after the company reported that its third-quarter net order growth was 27%, lower than analyst estimates.

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