Earlier this week homebuilder Lennar (NYSE:LEN) announced that orders for new homes rose by 30% during its fiscal first quarter. Clearly the last few years have been scintillating for the housing industry. Between the rock-bottom interest rates and folks flocking to real estate investments, Lennar's fundamentals have had an amazing run.

Lennar 2000 2001 2002 2003
Revenues (in billions) $4.7 $6.1 $7.2 $8.9
EPS $1.82 $3.00 $3.50 $4.65
Homes Delivered 18,578 23,899 27,393 32,180

Like June Cleaver, it's been all smiles for the homemaker. Lennar's peers have also enjoyed the ride. As the bull market of the 1990s was being gored earlier this millennium, homebuilders laid out the welcome mat. Since the Nasdaq Composite peaked on March 10, 2000, it has surrendered 60% of its value. Lennar, on the other hand, has seen its shares more than triple in that time. In describing the last few years of stock performance for competitors like Toll Brothers (NYSE:TOL), Centex (NYSE:CTX), and KB Home (NYSE:KBH), the term "bagger" has become a suffix requisite.

Between the money that fled the market needing somewhere to go and cheap borrowing costs stretching the value of the financing dollar, real estate became the logical resting place.

Even the most ardent of housing optimists couldn't have predicted that things would be going this good for so long. The big bad cyclical wolf was supposed to have blown this housing sector down dozens of puffs ago. It hasn't happened. But that doesn't mean that it won't happen.

By the time I inadvertently opened up my 100th piece of spam urging me to refinance before rates shot back up through the proverbial roof, I figured the sector's starry days were over. The problem is, that that was a couple of years ago. Our Home Center remains an active online destination, and with Bankrate showing the average 30-year mortgage running at an appealingly low 5.26% this past week, the "finance now or die, sucker" spam is drying up.

But there are a few reasons to worry here.

The obvious concern is that once interest rates start to climb -- you know, somewhere between now and the next ice age -- the sector will be in trouble. But that's a simplistic argument. While it's true that higher financing rates will shrink the value of the mortgaged dollar, an improving economy might make more of those same dollars readily available.

There are more bearish cases worth making. The two strongest arguments in favor of being wary -- regardless of which way interest rates go in the near term -- are the oversupply of new homes and the deceptively low P/E ratios.

This is not my beautiful house stock
Last year was a banner one with 1.84 million new homes going up. It hasn't been that high since 1978. That's why this is a tainted trophy. Do you really think there was a demand for so many new homes? With population growth under control and immigration checks running tight since 9/11, could we be staring at a glut of homesteads?

I think so. Car makers thrive because even pitted against a pesky used car market, eventually old cars start piling up in the junkyards. It doesn't work that way with home sales. While developers stretch the limits of suburbia for new projects, older homes are sitting on prized real estate. You will pay up for that new car smell, but existing homes earn a premium due to location, location, location.

This argument may ring hollow now. Developers are posting healthy order backlogs. But just wait, because this is the same kind of greedy volume expansion mindset that always sinks the cyclical. And yes, I know it's been awhile, but housing stocks are in fact still cyclical.

Cheap is in the eye of the shareholder
You're not worried because the stocks are still cheap, right? Throw Pulte Homes (NYSE:PHM), D.R. Horton (NYSE:DHI), and M.D.C. Holdings (NYSE:MDC) into the mix with Lennar, Centex, and KB Home, and they all trade in a tight range between nine and 11 times trailing earnings.

Given their heady bottom-line gains, that kind of resilience is probably worth paying up for, but don't assume that the stocks are discounting a sector reversal. These pre-teens bite.

Last month, the U.S. Commerce Department reported an 8% dip in new home construction for January. Even the National Association of Home Builders concedes that new housing starts will decline by 3% this year.

In order for homebuilders to grow earnings, they need to hike prices or the rate of new construction. The latter is already working against them and the former may follow suit. So what happens when earnings start to fall? You can pick your catalyst of choice, but the ultimate nature of cyclical companies is that the higher the highs the lower the eventual lows.

Lennar at 11 times last year's earnings -- or 10 times its projected 2004 showing -- is fair, but what if it starts climbing the same stairs down that it did on the way up? What if the company earns $4.65 a share next year but just $3.50 a stub come 2006? What if 2007 brings a $3.00 showing only to be followed by $1.82 a share the following year? Would you pay nearly 30 times a declining company's 2008 earnings today? What about 38 times the following year's profits?

You can argue that this is all hypothetical and that a company like Lennar has a growing portfolio and its financial services business to help soften the blow. You can. I won't. The sector's run has been spectacular but the big bad cyclical wolf will have no problem blowing through this house of cards.

I don't want to say that the party is over, but somebody called the cops, and your parents are pulling up into the driveway.

You are so busted!

Longtime Fool contributor Rick Aristotle Munarriz is happy in his home but owns no stocks mentioned in this column. His stock holdings can be viewed online, as can the Fool's disclosure policy.