Builders Have Further to Fall

As the national housing market remains plagued by high inventory levels of new and existing homes, builders are cutting prices to clear product, which creates near-term cash at the expense of profits.

"It's going to get uglier. As Stuart Miller at Lennar said, nobody knows where the bottom is," the hedge fund analyst says.

Impairments Multiply

Investors who thought at the beginning of the year that the worse was behind the homebuilder sector "are getting a rude awakening," says Alex Barron, senior housing analyst with Agency Trading Group.

"The tidal wave of impairments has started," Barron says. "They will continue at a high level through the end of the year, and maybe into next year."

To date, the top 19 public builders have recorded a total of nearly $7 billion in impairments, Barron says. He is not sure if builders are even halfway through the impairment process yet.

This signals further gloom ahead for the stocks.

In a research note last week, Bank of America analyst Daniel Oppenheim reduced his price targets on the homebuilding sector by 8%, because he expects the companies to record more impairments in the future that will amount to another 13% hit to equity. Already, impairments have cut about 8% of builders' equity.

Oppenheim estimates homebuilder stocks are already trading at 20% premiums to book value after adjusting for these future impairments. He rates the sector neutral.

Cash Concerns

The concept of book value has been key for homebuilders, since otherwise the stocks are trading at ridiculously high price-to-earnings ratios.