Scare stories related to housing just won’t go away. Friday evening saw the newest bear, ABC’s “Nightline,” join the chorus of doomsayers. The message does not vary: Demand is slowing, rising mortgage rates will slow it even more, and the rapid price increases of recent years are fast disappearing. Lending credence to the bearish view was last week’s report that December’s existing home sales fell 5.7%, the poorest showing since March 2004.

In other words, the overriding view is that the long-heralded bursting of the housing bubble will soon become a reality. Those who espouse the belief that housing will slow down but not crash are being branded as eternal optimists.

It’s no wonder, then, that the sizzling homebuilder stocks, which racked up a 32.4% gain in 2004 and another 27% advance in 2005, have leveled off dramatically this year, averaging a 0.7% loss in a rising market.

It’s no wonder, too, that the latest short interest (a bet that the stock prices will fall) show an average of 9.3% of homebuilders’ shares outstanding, just a hair under the December peak of 9.4%.

The builders with the highest short interest are Beazer Homes USA (28.7%), about a quarter of which is related to hedges against its outstanding convertible bonds; Ryland Group (14.6%), and WCI Communities (12.4%). The greatest increase in short interest over the past month occurred at D.R. Horton, up 23% for the second straight month, MDC Holdings (15%), and Hovnanian Enterprises (11%).

Whether it makes sense to sell homebuilders short at this juncture is questioned by some investment professionals. Chicago trader Marc Heller, for example, views the sizable short interest as “dumb and dangerous.” These are tough shorts, he says, as everyone already knows, the business is slowing, and that slowdown is already in the price of stocks. “If I had to guess,” he adds, “I would think homebuilders are better longs than shorts.”

A couple of pretty smart guys, Carl Icahn and George Soros, can attest to the risks of shorting homebuilders. Over the past year or so, both did just that, and they got clobbered doing it.

While many skeptics are convinced the homebuilders’ days of glory, characterized by spectacular stock gains in recent years, are all but over, analyst Robert Stevenson, who tracks the industry for Morgan Stanley, is not one of them.

For starters, he argues the price/earnings multiples of homebuilders – which have fallen 21% since August 1 – have overcorrected. The housing market is cooling, but valuations have pulled back too much, he says, considering his total stock return expectations for homebuilders this year of 10% to 15%, versus 12% for the S &P 500.

He also believes Wall Street’s consensus estimates are too low, given his current economic assumptions, namely:

* There is no housing bubble, although several markets are susceptible to a pullback in pricing.

* Long-term interest rates will rise only moderately, with 10-year Treasury yields ending 2006 at 5.25%.

Job growth remains solid, with unemployment likely to stay at 5% or lower for the foreseeable future.

* No deterioration in mortgage liquidity, credit quality, and/or underwriting standards.

Mr. Stevenson offers a number of other arguments as well to back his bullish case for homebuilders. Chief among them:

* Housing is a zero-growth, consolidating business, but larger public builders should consolidate market share over time.

* A more difficult operating environment will be especially tough on smaller, less capitalized builders, which should spur consolidation.

Public builders should enjoy ongoing growth through increased unit sales even as rates move higher.

* Homebuilders and their revenues are backed by hard assets. The land and the houses built upon them will have value that can be realized in all but the most difficult of economic times.

Summing up his contrarian happy homebuilding scenario, Mr. Stevenson contends a combination of healthy demand, moderately rising long-term interest rates, and low unemployment should allow operating fundamentals to stay stronger for longer. Further, he adds, given cheap valuations and moderate total return expectations for the S&P 500, the stocks are attractive.

His favorite stocks, each of which he thinks should be overweighted in portfolios, are KB home, Lennar Corporation, and Pulte Homes.