It’s one of the enigmas of the 2005 stock market, the question of whether the hot homebuilding stocks, which shot up a breathtaking 97.2% in 2003 and another 32.9% in 2004, are in for a bashing, or whether they’ll continue to rack up skyscraper gains.

Whatever you do, don’t pose that question to billionaires George Soros or Carl Icahn because they’ve both been dead wrong on these stocks. Each recently sold the homebuilders short (a bet their prices would fall), and they got their heads handed to them. In fact, Wall Street talk has it that Mr. Soros, the more aggressive of the two, actually shook up his fund (Soros Fund Management) because of the homebuilder drubbing.

As is evident by rapidly swelling short positions in most housing stocks – in numerous instances, the short interest represents 6% to 7% of the float – it appears that many investors, echoing the thinking of our battered billionaires, are also betting on a homebuilder bashing. The rationale is pretty much the same. With interest rates on the rise, termites, it’s felt, could soon be gnawing away at homebuilding stocks.

However, analyst Daniel Oppenheim of Banc of Americas Securities, thinks the housing bearishness is overdone. In brief, he sees homebuilder sales slowing, but still growing.

Despite his expectations of a slowing 2005 housing market, with new home sales likely to fall about 8% due to rising rates, he nonetheless believes this year should still be one of the strongest for new home sales as large, publicly traded homebuilders continue to capture market share from smaller private rivals. Mr. Oppenheim, who recently initiated coverage of nine leading homebuilders, sees industry earnings growth of 16% this year and 13% in 2006. That’s impressive growth in a slowing market, but still down sharply from the industry’s 34% annual earnings gain over the past five years.

Interestingly, the analyst notes, market share gains accelerate during industry slowdowns. For example, in 1999 new home sales fell 1%, but the nine large homebuilders tracked by Mr. Oppenheim racked up sales increases of 27%. Similarly, in 2000, new home sales were flat nationally, but the nine builders increased their home sales by 12%.

The analyst is pitching the purchase of two homebuilders – D.R. Horton and Hovnanian Enterprises – and figures the group will provide on average more modest gains, or total returns, of 11% over the next 12 months.

Aside from the biggies snaring a fatter market share, here are some key reasons Mr. Oppenheim looks for higher industry earnings and therefore higher stock prices:

* Expectations of unit sales growth of 13% both in 2005 and 2006.

* Significant order backlogs that provide earnings visibility well into the year.

* Further margin expansion as a result of initiatives to lower purchasing costs, leverage the existing infrastructure, and standardize the construction process-actions that could increase operating margins over time by as much as 200 basis points.

* Significant land supplies that could help spur future growth.

* Lower cost structure for public homebuilders, enabling them to capture an even bigger market share.

* Strong demographic trends that will lead to consistent demand for new homes. These trends would suggest annual new home sales in 2005 in excess of 1.05 million units, which would be higher than new home sales in all prior years other than 2003 and 2004.

* Reasonably high levels of housing affordability. Nationally, the affordability measure stands at 18.9%, which is in line with the 18.5% average over the past 10 years, as price increases have been offset by rising household incomes and declining mortgage rates.

* An improving economy.

* Low levels of supply, with speculative construction at historical low levels.

Another plus for the stocks, according to Mr. Oppenheim, is their reasonable valuations. At present, homebuilding stocks are trading at 7.1 times estimated 2005 earnings, which is an 11% discount to their historic multiple of 8. In addition, the stocks are trading at a 57% discount to the S&P 500 multiple of 16.7.

Maybe the real clue to this year’s performance of homebuilding stocks will be the “press indicator,” which has also been calling for a roof to cave in homebuilding stocks. In recent years, for example, the Wall Street Journal, Forbes Magazine, and the Fox cable network have repeatedly raised the possibility that the housing bubble is about to burst. Each time, that erroneous warning has proven to be a solid buy signal as homebuilding stocks proceeded to move even higher. So keep an eye out for the “press indicator,” since it could be a clear sign that the vigor of the housing market will sustain itself throughout the new year and that it’s time once again to buy homebuilding stocks.