Despite a two-day rally in builder stocks in which the sector gained roughly 5%, Credit Suisse home building analyst Ivy Zelman says in a report issued this morning (May 23) that "it is too early to mark the fundamental bottom [of the housing downturn] given ongoing deterioration in both absorptions and pricing."

Zelman, perhaps the most bearish of the home building analysts on Wall Street, writes that "the bounce in stocks is without fundamental merit," attributing the runup in part to comments by Treasury Secretary Henry Paulson's comments yesterday that the worst is over in the housing market. On the contrary, she writes, "Builders indicated their belief that it is only a matter of time before we see blood in the water as select, small and novice land developers are forced into foreclosure as land is re-appraised with highly leveraged positions. This would result in banks selling lots at distressed prices creating a mark-to-market in land values in the area."

Zelman noted that several participants at the confab have put off their expecations of a recovery in the housing market until 2009 and that some are suggesting that land values could fall back to 2001 levels. "Our current impairment estimates which are based on the premise that land values fall to 2003 levels may not be bearish enough," she writes.

Zelman characterizes the mood at the conference as "somber, with a ~30% drop in attendance from the prior year." She adds, "There was also builder concern regarding liquidity issues for smaller competitors and developers.

"We believe that once land values adjust to the market realities (2001-2003 prices)," she writes, "Wall Street will finally awaken to the true underlying book values of the companies."