An Ominous Message From Centex

Since that time, builder stocks have climbed as investors began to believe a bottom in the market was near. Centex is up 24% since July, but the stock is still down 25% for the year.

It's important to remember that no other homebuilder has given 2007 estimates. The consensus analyst prediction for Centex is now $4.13, compared with the $9.46 the company earned in fiscal 2006.

Shares of other builder stocks moved lower Friday after the Centex warning. KB Home (KBH Quote) fell $1.38, or 3.1%, to $45.95; Toll Brothers (TOL Quote) dropped 78 cents, or 2.6%, to $30.01; and Pulte (PHM Quote) shed 87 cents, or 2.5%, to $33.59.

Some have argued that builder stocks have already priced in scenarios like the one Centex unveiled Thursday. When builders begin reporting earnings later this month, look for other companies to record large charges for walking away from land.

The next wave of bad news will be a test for the sector, whose recent run may in part also been buoyed by a drop in the 10-year Treasury note. With the 10-year note's yield back up to 4.74%, builder stocks might have a lot to prove in coming months.