Housing demand is suddenly roaring back, and the nation's home builders are rushing just to keep up. New orders are soaring, as supplies of existing homes continue to plummet.
Stocks of the big builders, which surged even before real recovery began, continue to rise, up nearly 54 percent from a year ago. With room to grow, and after a decade lull, more builders are now going public.
Scottsdale, Arizona-based Taylor Morrison will make its initial public offering (IPO) Wednesday, according to filings with the Securities and Exchange Commission. It plans to sell 23.8 million Class A shares for between $20 and $22 a share. That would make the deal worth as much as $524 million. Taylor Morrison follows California-based Tripoint, which went public in January of this year.
Taylor Morrison, which builds in Arizona, California, Colorado, Florida and Texas, is a step-up builder. Prices for its homes average $364,000, not the entry-level, but not luxury either. It reported revenue of $1.4 billion in 2012, with sales and orders up 46 percent from 2011.
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"Unlike TPH [Tripoint], this is not a startup, and it already has a substantial land pipeline. It has significant momentum already in orders and backlog, and we think will do very well," said Alex Barron, an analyst with the Texas-based Housing Research Center.
With more room to grow, Barron is putting a Buy rating on the stock, which will start trading on the New York Stock Exchange under the ticker symbol TMHC.
"We are pretty much in the second year of what should be a multi-year recovery, and I think that that company seems positioned in some of the more attractive markets," he noted.
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Barron expects Taylor Morrison's revenues to grow 50-60 percent this year. "The pricing that they are quoting $20-22 a share seems decent price, where I think there should be upside for investors who participate."
But not all are bullish on the builders, especially those that concentrate in the formerly hard hit housing markets like Arizona and California. Inventories are low in these states and prices are surging largely because of huge investor demand for foreclosed properties. With a strong, new single family rental market, investors rushed in and are cashing in on rents, but some say that demand is already starting to ease.
"Despite multi-billion dollar buying sprees by well-funded Wall Street hedge funds, real estate investors bought fewer properties in 2012 than they did in 2011, which was a record year for investors. Investment-home sales declined 2.1 percent to 1.21 million from 1.23 million in 2011, but those sales had been well under a million during the market downturn," according to a new survey from the National Association of Realtors.
Meanwhile, previously surging single family rents are flattening. Nearly 4 million more single-family homes have been added to the rental market since 2005, according to Trulia.com. Supply has finally caught up with demand, with single family rents up just 0.1 percent in March from a year ago. That has housing bears roaring again.
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"In Phoenix—like Las Vegas, Florida, the Inland Empire, Central Valley et al—we now have a rental supply glut," said Mark Hanson, a California-based housing and mortgage analyst.
"Wherever the institutional money has gone in and ravaged is high risk for housing investment or building. These regions have become highly volatile speculative regions in which prices can rise 20 percent one year and fall 15 percent the next. The insti's have turned these markets into something I have never seen before...more like high-beta, speculative, volatile tech stock markets than housing markets."
Prices are soaring in these markets because all-cash investors are finding very little left to buy. Regular buyers can't compete with investors, so they are heading to the home builders. The builders were caught off guard, because they did not foresee this dynamic. Now they are rushing back to meet demand, while having no idea how long that demand will last. Why? Because when home prices get high enough, investors could cash out, pushing inventories higher and prices lower.
The birth of the new asset class, the REO (bank owned foreclosures) to Rent model, put a floor on home prices and reduced distress dramatically in the market. It also, however, added a new volatility to housing for years to come.
If investors hold and rent the homes, recovery will continue apace, but if sentiment shifts, and investors see bigger returns in sales than rents, the game could turn quickly.
RealtyCheck producer Stephanie Dhue contributed to this report.
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