Investors certainly ignored a telling market clue: Donald Trump recently boasted in a TV ad that he was being paid more than $1 million to speak at a symposium on how to make money in real estate.That ad, coming as it did on the heels of the biggest bull market in the history of real estate, seemed to some Wall Streeters as an unmistakable sign of a market top.

They may have been right. Giving credence to their thinking, luxury homebuilder Toll Brothers lowered its 2006 expectations yesterday. In response, shares of the entire homebuilding sector took a drubbing.

To some Wall Street observers, these events suggest that the once torrid housing market could cool off even more dramatically in the months ahead and that it’s time to lighten up on, if not dump, those hot homebuilding stocks. Over the last one, three, and five years, this sector has run rings around the overall market, with a number of homebuilding stocks more than doubling and tripling in the process.

So far this year, the group – though beaten up in recent months amid weakening housing prices, slowing sales, and rising interest rates – is holding true to its outperforming trend in a flat market with a 13.9% rise through October 31.

In a related development, and with some unfortunate timing, an analyst at Morgan Stanley, Robert Stevenson, recently issued a bullish commentary on the homebuilding industry. In it, he re lated to the concerns of a housing bubble as “overblown” and declared that homebuilder stocks were oversold.

He was so convinced he was right that he initiated coverage of the homebuilding industry and pitched three stocks he said should be overweighted in investment portfolios.They were KB Homes, Lennar, and Pulte Homes, which the analyst reckoned offered the potential of above-average total industry returns of 19% to 22% over the next 12 months.

Overall, he wrote, he expected the homebuilding group to outperform the market over the next 12 months with total returns of 10% to 15%, versus an expected 8% return for the S&P 500 (as seen by a Morgan Stanley strategist, Henry McVey).

What does Mr. Stevenson think of the Toll announcement? Alas, he doesn’t speak to the press, but one of Morgan Stanley’s institutional clients told me the analyst is sticking to his bullish guns, including his expectation that homebuilders will go on posting good performance as long as job growth remains solid and long-term interest rates rise only moderately.

One of his arguments is that the homebuilding group is trading at its lowest forward four-quarters earnings multiple in 18 months. Although Mr. Stevenson doesn’t expect valuations to revisit their recent highs over the near term, he does expect some multiple snapback as the macroeconomic outlook becomes clearer.

The analyst, judging from his commentary, figures higher incomes and favorable demographic trends should keep housing operating fundamentals stronger for longer than many observers believe, even as interest rates rise. This outlook, coupled with valua tions he believes do not reflect the homebuilders’ financial strength, leads him to expect mid-teens total returns from the group even as housing starts to return to normalized levels and pricing becomes more moderate.

What about the risk arising from the big gains in housing values? Mr. Stevenson’s commentary notes that while housing prices in many markets have become overheated and some markets could be vulnerable to falling prices over the next year, he believes that in most markets the risk is only a 5% to 10% decline in value over a two-year period, with little to no appreciation for several years thereafter.

A more reasonable scenario, he thinks, is that housing prices will moderate over the next 12 to 18 months, with values flattening for some time thereafter, leaving some markets slightly down after adjusting for inflation.

Mr. Stevenson’s bullish view of the homebuilding sector is based on a number of assumptions, notably that the 10-year Treasury yield ends at 5.25%, large public builders will have the opportunity to increase market share and land positions at the expense of smaller builders, unemployment stays at roughly 5%, and the mortgage industry remains healthy. The analyst’s earnings outlook for his three favorites runs as follows:

* KB Homes, $9.36 a share in 2005, a projected 64% gain over last year, and a 22% rise to $11.41 in 2006.

* Lennar: $8.14 this year, an estimated 43% rise over 2004, and another 16% gain to $9.44 in 2006.

* Pulte Homes: $5.41 this year, a projected 43% rise over last year, and a 21% jump to $6.54 in 2006.

My own thinking: Housing affordability is now at its lowest level in a decade. That’s surely not what bull markets are about.