rpm is normally able to install .src.rpm files. However the rpm package does not own /usr/src/redhat - rpm-build does. Without this directory, attempting to install a .src.rpm fails with: error: cannot create %sourcedir /usr/src/redhat/SOURCES Creating /usr/src/redhat allows the .src.rpm to be installed. This bug has been present since FC5.
Solution: install rpm-build. You need this to do anything useful with the contents of the .src.rpm anyway. If you don't want to wait that long, just do: mkdir /usr/src/redhat and try again.