Joint Ventures May Bury Builders

The problem for Lennar now on such ventures is that "when things go bad, you have no partner to go shoulder to shoulder with," the person says.

Lennar, which declined to comment for this story, has already begun unraveling some deals. Pacific Coast Associates, an affiliate of private developer Taki-Sun, bought Lennar's interest in the development of SeaPort Marina in Long Beach, Calif. Terms were not disclosed.

Brookfield Homes(BHS Quote) in December acquired Lennar's interest in Heritage Shores, a single-family home development that the two parties were planning to build together in Bridgeville, Del. Terms were not disclosed.

Cash-Strapped

The housing downturn has left Lennar and other public builders cash-strapped, which is hurting their negotiations with better-capitalized JV partners when trying to sell off stakes.

"We're executing buy-sells at lower than true market value," says one land investor who has worked with Lennar. "Public builders can't come up with the cash to do [the project] or will be heavily penalized by the market if they do," he says.

In a recent research note, Deutsche Bank analyst Nishu Sood downgraded Lennar to hold because of the firm's joint venture exposure. The company's exposure is more than three times larger than any other builder's, Sood noted, while its recourse amount is nearly five times bigger than any other builder's.

"Apart from these quantifiable exposures, less apparent risks include more difficult to measure completion guarantees, reimbursement risk and various other indemnifications the company provides," he wrote. "We think joint venture operations are inherently riskier as well, in that they are more highly leveraged and more involved in longer-term land investments."

The end result of all this could spell danger for homebuilder investors and the broader housing market.

In markets where housing became overinflated, there are record inventories of existing and new homes. But if builders sell land at firesale prices, that makes it easier for vultures to sweep in and build new houses because of the new cheaper land base.

This, in turn, will put more pressure on existing home prices in these formerly hot markets, industry sources warn.

So wait for this ugliness to play out before dipping into the homebuilder stocks.