More Land Mines for Builders

Homebuilder stocks' recent run has been fueled by a belief that the housing sector will get better, or at least not get worse, in 2007.

But there's a real possibility that housing prices will continue to fall in once-hot regions of the country such as Florida, Arizona and California. If they do, investors likely haven't seen the end of the big land impairment charges that have only recently reared their ugly head at homebuilders.

Land charges basically take the form of two types: option contract write-offs and land impairment charges. Both charges are one-time, typically noncash expenses that hurt earnings.

Wall Street earnings estimates -- along with the stocks' valuations -- may not be pricing in this risk. Should these charges unexpectedly mount, 2007 could be another rough year for builder stocks.

KB Home(KBH) has already warned of large write-offs and impairments for its fourth quarter. Toll Brothers(TOL), Pulte Homes(PHM) and D.R. Horton(DHI) have announced similar charges, though on a smaller scale.

Just last week, Hovnanian Enterprises(HOV) said it recorded $336 million in land charges -- the largest such charges among builders to date -- and as a result posted a $115 million loss for its fiscal fourth quarter.

Interestingly, Hovnanian said on its conference call that its fiscal 2007 guidance assumes zero additional impairments and land charges.