Housing stocks on fire

Housing stocks got off the mat Thursday in anticipation of a government-backed plan to limit foreclosures. Among the biggest gainers in early afternoon action were Toll Brothers (TOL), the big luxury homebuilder, Countrywide (CFC), the biggest mortgage lender, and MBIA (MBI), the bond insurer whose shares plunged Wednesday after a rating agency said the firm may need to raise more capital as loan losses pile up. Other big gainers included MGIC (MTG), the mortgage insurer that lost $372 million last quarter as it wrote off an investment in a subprime mortgage venture, and Radian (RDN), whose merger with MGIC blew up after the market for mortgage-backed securities collapsed.

Two things are surprising about this rally. First, these stocks rose sharply last Friday, when word got out that Treasury Secretary Hank Paulson was trying to put together a package to ease the pain of sharply rising payments on adjustable rate mortgages, or ARMs. (Despite rising criticism of that plan, Fortune’s Adam Lashinsky, for one, still wants his frozen.) Second, it’s not at all clear that the Paulson plan — which is to be formally unveiled by the White House this afternoon — will really help borrowers, lenders or mortgage insurers all that much. Foreclosures are already at 20-year highs, going by numbers released Thursday, in a trend that’s certain to be costly for mortgage servicers and investors. And because so many homeowners overstretched to buy houses when prices were appreciating, many borrowers may not be able to continue paying even at their pre-reset interest rate.

Analyst Gary Gordon at Portales Partners says the lesson is that investors want to believe the bottom has been reached in financial and housing names. But he points out that today’s move amounts to the 10th substantial rally this year in the housing stocks, and each of the previous nine ended with the stocks below where they started. He says the poor fundamentals of the housing and mortgage markets make calls for a nascent recovery amount to “false hopes.” Sometimes, Gordon adds, referring to far-fetched hopes that housing will bottom soon, “It takes a while for people to absorb a new concept.”