The homebuilding craze had to slow down sometime. After a red-hot three-year run, the industry has certainly fallen on hard times. Thirty-year mortgage rates are now hovering around 6%, and the August Census Bureau report showed that, in the past year, housing starts declined 13% and permits dropped 21%.

As a result, the stocks of major homebuilders have slid nearly 31% as a group over the past year. In fact, most are now trading with single-digit P/E ratios -- some even below 5.

Now that there's blood on the streets, it's clearly time to ask the question: Are these stocks undervalued?

Investors on the fence
A quick look at investor sentiment on our new CAPS beta service shows that the investing community generally has mixed feelings on whether the following homebuilder stocks will "outperform" or "underperform" the market. Take a look:

52-Week Returns*

% Outperform Rating**

Beazer Homes USA






DR Horton



Hovnanian Enterprises



KB Home



Lennar (NYSE:LEN)



MDC Holdings






Pulte Homes (NYSE:PHM)



Ryland Group (NYSE:RYL)



Toll Brothers (NYSE:TOL)



*Data courtesy of Yahoo! Finance
** Source: Motley Fool CAPS as of Sept. 21, 2006

Point, counterpoint
Each of these stocks has had participants enter bull and bear commentaries for its CAPS entry.

CAPS investor TMFBreakerBeth, for instance, thinks Toll Brothers is poised for growth:

Yes, the housing bubble is supposed to be bursting and all, but I contend that TOL is priced for conditions in the industry to get much worse than I believe they're going to get. Further, Toll's high-end market is likely to be less affected by recessionary woes than the broader housing market.

On the other hand, investor Jeffreyw thinks Toll Brothers will continue to underperform:

With mortgage rates rising and inflation rising, home values will level off, demand will drop, and baby boomers will be downsizing and cashing out of their homes. Interest-only mortgages will be forcing more bankruptcies, flooding the housing market with repo homes.

What side are you on?
Five years from now, we're either going to look back on today's homebuilders and say, "Wow, what a bubble that was!" or "Holy cow, those stocks were cheap!" Which will it be? You tell us.

Fool editor Todd Wenning does not own shares in any of the companies mentioned in this article. Check out his CAPS page here. The Fool's disclosure policy prefers raising barns to building luxury homes.