NEW YORK ( TheStreet) -- The long-suffering housing stocks soared Wednesday on positive industry data, and while no one's ready to proclaim the market healthy again, it may be time to give some of these fixer-uppers in the group a look. The catalyst for the jump was the National Association of Home Builders survey for January, which rose 4 points to 25, its fourth straight positive month and the highest reading since June 2007. That's right, just before the bubble burst. "Builder confidence has now risen four months in a row, with the latest uptick being universally represented across every index component and region," said Bob Nielsen, the group's chairman as well as a builder from Reno, Nev. "This good news comes on the heels of several months of gains in single-family housing starts and sales, and is yet another indication of the gradual but steady improvement that is beginning to take hold in an increasing number of housing markets nationwide -- and that has been shown by our Improving Markets Index. Policymakers must now take every precaution to avoid derailing this nascent recovery." That last part is the key question for investors thinking of dipping into the sector. Wednesday's gains were impressive -- Hovnanian Enterprises ( HOV - Get Report) rose 12% to $2.39; KB Home ( KBH - Get Report) advanced 7.6% to $9.69; Lennar leapt 4.4% to $23; PulteGroup ( PHM - Get Report) surged 6% to $$7.94; Beazer Homes ( BZH - Get Report) added 6.4% to $3.14; and Toll Bros. ( TOL - Get Report) tacked on nearly 5% to $23.49 -- and volumes were all above the average activity in the stocks. But given the depths these stocks have visited in the past year, there's likely more upside to be had, provided the data plays along. Thursday brings housing starts and building permits for December at 8:30 a.m. ET, so the nascent recovery thesis is going to get tested quick. In November, housing starts came in at 685,000, a major surprise vs. the consensus view of 627,000, and the estimate for December is for a slight dip down to 673,000. Another big beat and it could be off to the races. Ian Shepherdson, chief U.S. economist at High Frequency Economics, weighed in on the news, noting the importance of psychology in this market niche. He said the survey's results imply a 50%-plus increase in new home sales but acknowledged this is coming off a very low base so it's premature to get too carried away.
"New home sales fell by 78% from their peak, dropping from over 1.3 million in mid-2005 to just under 300K at their recent low, a decline of over one million sales per year," he wrote in commentary on Wednesday. "A 50% rebound from current levels, therefore, would recover only 15% of the ground lost when the market crashed." Still, he sees the ingredients coming together for a recovery because momentum and confidence are such powerful forces in the housing market. "Appearances count, and a 50% increase in sales, or anything like it, even from a very low base, will spark a frenzy of commentary suggesting the market is turning," Shepherdson said, adding later: "
With several years' worth of pent-up demand from first-time buyers, mortgage lending conditions easing substantially and affordability spectacular, we think an initial upturn in sales could morph quite quickly into a sustained recovery." The caveat though is that while Shepherdson sees the potential for volumes to come back, he doesn't expect prices to take the same elevator up, saying: "The supply overhang -- from both private sellers and foreclosures -- is still enormous." The NAHB itself was careful to tap the brakes on the optimism as well. " Caution remains the word of the day as many builders continue to voice concerns about potential clients being unable to qualify for an affordable mortgage, appraisals coming through below construction cost, and the continuing flow of foreclosed properties hitting the market," said David Crowe, the chief economist of the industry group. So which housing stock is worth considering if investors want some exposure to the group? Hovnanian had the biggest pop on Wednesday, but the stock is also among the most beaten-down (off 54% in the past year) and the company isn't expected to turn a profit in fiscal 2011. Beazer is in the same boat with the current consensus calling for losses through fiscal 2013. KB Home has a bit more diversity, as it also provides financial and insurance services for home buyers, and it's expected to make it back into the black in the fourth quarter of 2012. Toll Bros. is anticipated to turn a profit in its current fiscal first quarter but it's also tied to the luxury market, and there may not be much movement in prices.
Lennar looks like the most solid choice at the moment. It's profitable now with Wall Street expecting earnings of 4 cents a share in the company's fiscal first quarter ending in February on revenue of $690.8 million. Buy-side sentiment is positive with 14 of the 24 analysts covering the stock at strong buy (4) or buy (10), although the median 12-month price target of $24 doesn't offer much upside from current levels. PulteGroup is also a possibility. It's anticipated to return to profitability in the fourth quarter of this year, and is taking steps to address its $3.3 billion debt load, such as recently divesting property in the Denver area. The stock has already more than doubled since plumbing a 52-week low of $3.29 in early October though so more volatility likely lies ahead. The SPDR Homebuilders ETF ( XHB - Get Report) should get some consideration as well as it provides broad exposure to the sector, sparing investors from trying to pick the right name. It was up 3.5% to 19.12 on Wednesday. -- Written by Michael Baron in New York. >To contact the writer of this article, click here: Michael Baron. >To submit a news tip, send an email to: email@example.com