The bulls aren't exactly disputing those problems

    "Longer term, we continue to envision a much-slower-than-usual housing recovery," Raymond James says in its report recommending builder shares. Part of the reason for that: The number of aging baby boomers looking to downsize will outstrip "potential first-time buyer." Also, "excessive inventory" and "unsustainable levels of government support" will dampen demand. And let's not forget that a huge number of homeowners are underwater - their mortgages are bigger than the value of their homes.

    Nonetheless Raymond James (RJF) has raised near-term ratings on KB Home (KBH), Lennar (LEN), and Standard Pacific (SPF); the firm added that it is sticking with its "outperform" rating on MDC Holdings (MDC).

    Others are also raising ratings. Ticonderoga Securities moved Meritage Homes (MTH) to buy from neutral this week. UBS (UBS) lifted Beazer Homes (BZH) mid-July to buy and Zelman and Associates boosted M/I Homes (MHO) to buy from hold as well.

    The reasons for the upgrades are both price-based and company specific.

    "KB Home now represents our current favorite idea in the sector, based on its strong focus on entry-level buyers, disciplined spec construction strategy, and 20%+ valuation discounts relative to peers." Raymond James writes in an earnings update. Stifel Nicolaus also says the stock is cheap -- "lowest valuation metrics of the group" -- in analyst-speak.

    UBS likes Beazer because the analyst has become convinced that the small cap company is managing risk better and is trimming overhead. Many of the publicly traded companies have also been building cash and are in a good position to invest in land and build -- or have already bought land on the cheap. In the case of Lennar, Raymond James likes its gross profit margins -- more than 18% last quarter -- and the potential for profits in its Rialto subsidiary, which has invested in nonperforming loans in a partnership with the FDIC.

    A few housing economists agree that even with a dim outlook for housing, a few companies may come up winners -- especially if more builders go out of business, both big and small, private and public. The population is still growing by about 1.2 million households annually. Even in places like Las Vegas demand for new homes will return. No one wants the 4,000-square-foot McMansions.; who knows, they could be destined for bulldozers. But 1,700 square foot homes -- people are showing interest in those.

    "New home builders are experts at land development and will find deals at a time like this," writes the stock-watching blog Ychart. "Look for them to do that, use their cash on hand, build more right sized homes at a lower cost (and better margin) that fit demand and return to back to profitability in 2011."

    The bears just shake their heads. 'This isn't the trough; it will take close to a decade to work off the overhang; we're only about half-way through.' The bulls don't necessarily disagree with that scenario. But they still see value for individual firms. Someone will be building somewhere and someone will be buying.

    "From a macro perspective there's no reason to be in homebuilders," says Barry Ritholtz. For now, given the volatility in the group, it's a place for traders and professionals, not long-term investors. "There's no such thing as toxic assets, only toxic prices," Ritholtz says.

    Let the buyer beware.