Wall Street has bet big over the past few months on a housing recovery that, according to most views, is still likely a good distance in the future.
Home builder stocks in particular have gotten a huge boost over the past three months or so, rising more than 50 percent since the end of the third quarter.
Analysts attribute the move to two primary factors: The belief that the government is planning some type of interventionto help deal with the glut of foreclosures still on the market, and a cyclical move in the stocks that often comes in anticipation of building season.
Considering the numerous headwinds still facing the housing market, housing-related stocks could have a rough time keeping up such a torrid pace.
"On the bright side, housing is legitimately improving," said Mike Widner, homebuilder analyst at Stifel Nicolaus in Baltimore. "In terms of housing and housing construction, it's going to take another five years—20 percent growth a year for five years—to get back to a normal pace of construction."
The downside, though, is that most of the industry's biggest names are trading at nine times earnings, which is the target Widner has for them in 2016. In other words, without a powerful force to drive earnings, there's little reason to buy the stocks at current levels.
As such, Widner has downgraded Toll Brothers and D.R. Horton to "sell" status, even as the market continues to show appetite for the companies. Toll has risen 8.3 percent in just the last month but trades at nearly 1.5 times book value. D.R. Horton is up 6.5 percent over the past 30 days and trades at 1.7 times book.
"Most of the stocks are trading today at the same place where they were a year ago," he said. "These are sentiment-driven stocks. It's almost impossible to time what's going to set people off. I don't think housing is off to the races here."
After taking a beating during the financial crisis and sinking to its worst point since the Great Depression, housing has shown some grudging signs of improvement.
Both housing prices and single-family starts have increased, but it's been multi-family— apartment buildings and the like — that have shown the greatest gains.
That's likely to be the way things stand for at least the next several years.
"The housing market is very sensitive to the overall economy," said Michelle Meyer, U.S. economist at Bank of America Merrill Lynch. "It is going to take years before the housing market appears normal. But, progress should be made in the next few years."
Meyer sees five principle trends to watch: A sideways move in single-familystarts; a continued torrid pace in starts for multi-families, which surged 60 percent in 2011; home prices falling another 7 percent through 2013; another eight million foreclosures through 2015, on top of the seven million so far during the crisis; and Congress to develop a plan to get real estate-owned, or REO, properties off banks' books.
Federal Reserve Chairman Ben Bernanke recently took a nearly unprecedented and controversial step to issue a white paper to Congress, asking for fiscal support to allow Fannie Mae and Freddie Mac to handle REOs. That proposal entails converting the properties to rentals either by having the two government-sponsored enterprises either rent them directly or sell the properties to investors who would rent them.
Ralph Axel, a rates strategist also at BofAML, called the plan possibly "one of the most important housing market developments this year," and investors have taken notice.
Short interest remains at elevated levels both both for builders and building products, but has come off in recent weeks.
Yet JPMorgan analyst Anthony Paolone issued a string of moves for housing-related stocks Thursday, upgrading four but downgrading nine stocks in the space, according to StreetAccount.
Upgrades went to CBL & Associates , Kimco Realty, ProLogis and PS Business Parks.
Downgrades went to Alexandria Real Estate, Douglas Emmett, Entertainment Properties Trust, Equity Residential, Lexington Realty, Macerich, Piedmont Office Realty Trust, Weingarten Realty and Washington Real Estate Investment Trust.
Indeed, even those bullish on the sector overall think now could be a good time to take some profits.
After all, Lennar, one of the industry's other billion-plus market cap companies, missed recently on earningsbut saw a boost after it beat on revenues, deliveries, new orders and backlog.
That kind of enthusiasm could spell at least a near-term top until investors can get a better handle on what kind of year it's going to be for housing.
"Within financials, real estate is our favorite sector. But I can't tell you I want to buy them right here, right now, given how much they've run," said Rick Bensignor, chief market strategist at Merlin Securities in New York. "They've gotten a little ahead of themselves. But it means that to do some extent, the worst in the real estate area is over."