WALL STREET prides itself on seeing things before they are broadly apparent. But, sometimes, even the shrewdest investors get ahead of themselves. The stock market, the old joke goes, has predicted nine of the last five recessions.


Today, Wall Street seems highly confident that housing is on a clear path to recovery. Homebuilder stocks have been some of the strongest market performers all year.


“It does appear we’ve turned the corner and a housing recovery is under way,” said Bradley B. Thomas, an analyst at KeyBanc Capital Markets, who looks to the combination of new-home and existing-home sales. In August, sales in both categories improved over the same month the previous year. It was the 14th consecutive month when the combined total showed year-over-year gains, Mr. Thomas says.


“We continue to expect recovery over the next three to five years, if not five to 10 years,” he projects.


But in some ways, the housing situation is still murky. Yes, sales of new and existing homes, along with prices in many areas, have been rising. But, as Mr. Thomas points out, new home construction in August still remained 49 percent below the average monthly level for the last 30 years. And despite the Fed’s persistent push to lower mortgage rates, credit remains tight. A large inventory of likely foreclosures continues to hang over the market.


None of this has damped the animal spirits propelling shares of homebuilders like Toll Brothers — which climbed from just over $20 at the beginning of the year to $33.25 at the end of the third quarter. And the Pulte Group, a $6 stock late last year, more than doubled. So have the homebuilder stocks come too far, too fast? Has the easy money already been made? Are there better ways to play a developing recovery?


Donald W. Hodges, a manager of the Hodges Pure Contrarian fund, has ridden the homebuilder surge through his large position in Pulte, which represents over 8 percent of his portfolio. Mr. Hodges says he picked up the Pulte shares, which traded at $15.50 on Sept. 30, at an average cost of about $7.80. He says he believes that the shares could go sideways for a while but that he likes them for further gains over the long haul.


“If a person were a trader — which I’m not — he might trade out,” Mr. Hodges says. But he says he thinks the housing recovery has just begun and should support further long-term gains for homebuilders like Pulte.


“I think it’s still early in the game,” he says. And he sees large homebuilders picking up market share as smaller ones keep dropping off. “The small guy just doesn’t have the staying power,” he says. “I think the business will end up more and more in the hands of the bigger companies.”


One fund manager who has been lightening up on large homebuilder positions is Jerome Dodson. He is sole portfolio manager of the Parnassus Fund and lead portfolio manager of the Parnassus Small-Cap fund. In recent months, Mr. Dodson has reduced his homebuilder positions by roughly half. Parnassus Small Cap has sold 600,000 shares of Pulte and 100,000 shares of Toll Brothers, and the Parnassus Fund has sold 550,000 shares of Pulte, 250,000 shares of D. R. Horton and 100,000 shares of Toll Brothers.


The funds trimmed positions, he explains, because homebuilders had reached target prices. Parnassus bases share-price targets on such valuation metrics as price-to-earnings, price-to-sales and price-to-book-value ratios.


Though Mr. Dodson has scaled back his bets, the two Parnassus funds are still banking on further housing gains. Before the sales, Pulte, D. R. Horton and Toll Brothers shares comprised roughly 15 percent of the Parnassus Fund portfolio. Even after the heavy selling, they comprised 7.4 percent as of Aug. 31.


Such large positions are justified, he says, because target prices may be raised as the housing recovery gains momentum. And he thinks it will. “We’re early in the recovery — very early,” he says.


Mr. Dodson explains how a homebuilder like Pulte, which exceeded its original target price, could still move higher. He estimates that Pulte will earn 50 cents a share in 2012. That would mean a rich P/E ratio of 31, more than Pulte would normally command. But he says he believes Pulte could eventually earn much more.


“In my view, they could earn $1 to $1.50,” he explained. This would be possible, he reasons, even without a revival of the unsustainably loose credit conditions that produced the housing bubble.