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Homebuilders know all too well that for an abode to have any chance of withstanding the onslaught of a storm, it needs to rest upon a sturdy foundation. The same goes for Toll Brothers on Tuesday, as investors were willing to reward firms anchored by a foundation of cash and a liquid balance sheet.

Shares of the Horsham, Pa.-based builder rallied in mid-day trading Tuesday after Toll Brothers reported better-than-expected second-quarter results, supported with more than $1.2 billion of cash on its balance sheet and nearly $1.3 billion available on its credit facility at quarter-end. The liquidity “will allow the company to take advantage of opportunities that arise from less financially flexible peers as we move through the downturn,” UBS analyst David Goldberg said. The broker maintained a buy rating on the stock, despite forecasting a 2008 loss at Toll of 70 cents a share.  UBS sees Toll as well-positioned to weather the downturn and emerge stronger, given its unique land position and liquid balance sheet.

The shares rallied despite Toll management’s noting that demand has not yet stabilized, citing difficulties in selling existing homes. The company also reported a 44% decrease in traditional unit orders and a 58% decrease in dollar value resulting from a 17% decrease in the average order price to $590,000.

Still, analyst Paul Puryear of Raymond James noted that the company’s balance sheet continues to improve, reiterating an outperform rating on what he called sufficient liquidity to navigate the current downturn and take advantage of distressed land opportunities he expects to materialize later in 2008.

Analysts found less favor with fellow homebuilders Hovnanian Enterprises and Standard Pacific Corp., however, as Wall Street focused on the companies’ capital constraints and debt to capital ratios. UBS maintained a neutral rating on Standard Pacific, saying limited availability of debt financing and capital will restrain profitability and hinder operating capabilities over the near term.

Lehman Brothers said it expects Hovnanian, which is scheduled to release second-quarter results after the closing bell, to use proceeds from its recent equity and debt offerings to pay off $325 million drawn on its credit facility and to end the fiscal year with more than $700 million in cash on its balance sheet. Lehman reiterated its underweight rating on Hovnanian shares because it expects the homebuilder’s net debt to capital ratio to exceed 70% if current write-downs continue (compared with Toll Brothers’ 23.7%).

Homebuilder stocks have seen the most impressive gains this year. But they’re far from out of the woods yet.

Wall Street analysts may “substantially” reduce their earnings estimates for the homebuilding industry over the next several quarters, according to a recent Lab Thomson report.

“It should be noted that analysts have been optimistic regarding earnings for the homebuilding industry” recently, the report said. “Based on this recent overestimation, there is risk that analysts may revise estimates lower.”

Over the past six quarters, actual net income for the industry on average has been $1.8 billion below the estimate at the start of the quarter, the report said. And currently, the homebuilding industry is the top contributor to the anticipated earnings growth rebound for the consumer discretionary sector in the S&P 500 Index in the second half of the year, the report said.

For the third quarter of 2008, the estimated earnings growth rate for the consumer discretionary sector stands at 39%, with the homebuilding industry contributing 43%, or $2.3 billion, of total expected growth. For the fourth quarter, analysts are forecasting earnings growth of 44% for the discretionary group, while the homebuilder industry is seen contributing 62%, or $4.02 billion.

If the homebuilding industry is removed from the index, the third quarter and fourth quarter estimated growth rates for the consumer discretionary sector would drop to 17% and 12%, according to the analysis.

Federal Reserve Chairman Ben Bernanke said he expects the housing market to stabilize some time down the road, but those looking for a bottom in homebuilder stocks should look the other way — they should check the rear view mirror.

The iShares Dow Jones U.S. Home Construction ETF (ITB) was trading up 3% at $21.61, and reached a 6-month high of $22.30 in intraday trading. Volume in mid-afternoon trading was 2.8 million shares, well above the full-day average over the past 30 days of 1.1 million shares.

More importantly, the homebuilder sector tracking stock is on track to close above the 200-day simple moving average for the first time since March 1, 2007. It has peeked above the line several times since then during intraday trading since then, but has failed to hold those levels through the close — until now.

The 200-day SMA, which currently comes in at $21.08, is seen by many chart watchers as the trigger for bull or bear markets. The days high volume suggests this leap of faith did not go unnoticed.

If that’s not enough to suggest a bottom may already be in place, another bull-vs.-bear market rule of thumb on Wall Street is a 20% move off a low or high.

At last look, the ITB was 54% above the all-time low close of $14.03 on Jan. 9, and 61% above the all-time intraday low of $13.41 hit on the same day.

If homebuilder stocks actually bottomed 3 months ago, it can’t be long before Bernanke’s prediction comes true, and the housing market does more than just stabilize.