Homebuilders have gotten pounded on Wall Street this year, with a “sky is falling” outlook dominating the market.

However, some analysts are now suggesting that the sky has fallen far enough and the stocks are a relative bargain. So far, investors are buying that, at least for Ryland Group Inc.

Shares in the Calabasas company which has a lower profile than L.A.’s other big homebuilder, KB Home got a boost last week when a Citigroup Global Markets analyst upgraded the stock from a hold to a buy.

“We do not pretend that any near-term relief in industry fundamentals is in sight. However, it bears repeating that the home-building stocks have an established history of rallying well before industry fears have finished transitioning into fact,” wrote analyst Stephen Kim in a note to investors in which he also upgraded several other companies in the sector.

Ryland shares closed at $25.67 on Oct. 3., up 7 percent for the week. That’s down nearly 60 percent from its 52-week high of $60.13 back in early February as the subprime lending meltdown was just unfolding.

How drastically the market has changed for Ryland can be seen in its second quarter financials. The company reported a $2.4 million loss after net income of $94.8 million in the second quarter a year ago. Revenues fell 38 percent to $740 million.

Those numbers have Wall Street as a whole remaining cautious. Of the 12 analysts covering Ryland only four rate it a buy, while two recommend a sell and six have holds on it. And while Kim upgraded the stock, he also dropped his target price from $40 to $35, similar to what he expects from KB Home.

Some analysts, such as Chris Hussey of Goldman Sachs Group Inc., told investors he doesn’t see the carnage abating any time soon.

“Over the last six business cycles in the U.S., new home sales declines have not recovered until the U.S. entered an economic recession,” said Hussey, who rates Ryland “neutral” and last month lowered his price target from $39 to $23.

Meanwhile, Ryland is not standing still. The nation’s eighth-largest homebuilder is attempting to cut costs on the homes it builds and continues to look to diversify its land holdings. The company also is opening fewer new subdivisions.

That’s all in line with a recent U.S. Census Bureau report indicating that in August the number of permits to build new houses fell by 8.1 percent and the number of people beginning the construction of a home dropped by 7.1 percent.

Diversity gains

Ryland is staying out of once blistering hot markets such as Phoenix and Fort Myers, Fla., where there is a large oversupply of homes. Moreover, its strategy of diversity should pay off in the now cool California housing market, where the company only has 12 percent of its hard assets, defined as its newly built but unsold homes.

“Ryland’s strategy hasn’t changed a lot,” Chief Financial Officer Gordon Milne said at a Credit Suisse Group homebuilders conference on Sept. 18. “We tried to be conservative going into this downturn. We tried very hard to maintain a geographic diversity.”

Ryland operates in 28 states and has a policy of not having more than 10 percent of its assets in one market, he said. Analysts have taken note. Carl Reichardt of Wachovia Capital Markets LLC rates Ryland shares “outperform” and wrote in a recent research note that Ryland’s business model of a “diverse geographic spread” is appealing.

And while the company is opening fewer projects, it is also attempting to cut costs. Milne said that it has reduced the cost of materials for each new house it builds to $68,000 from $77,000 last year.

“The good news is we’re bringing those costs down,” said Milne, though he pointed out that when a home has to be discounted 11 percent to sell, construction savings don’t “offset the pain on the discounting side.”

With all the reports of a stalled housing market, on the surface it may appear questionable why Ryland is building at all. It’s because other areas of the country are still facing some demand, compared with Southern California, which has been overbuilt.

According to the National Association of Realtors, there was a 10-month supply of homes in the country as of August; a six-month supply is widely considered the benchmark for a healthy market in equilibrium.

“We still are selling homes,” Milne said.