Homebuilders Still Rotting Despite Fed Cuts

Declining Home Prices

So how exactly do the builders start making money again?

There are only a couple of ways: home prices rise, or expenses get cut further.

The latter method is pretty unrealistic, since many builders have already laid off much of their staff and are not gaining much traction in getting suppliers to cut material costs.

The other issue -- home prices -- doesn't look to be getting better anytime soon. Inventories of homes remain high, partly due to the wave of foreclosures across the country that are pressuring home prices even further. RealtyTrac earlier this week released its U.S. Foreclosure Market Report, showing a whopping 112% year-over-year increase in first-quarter foreclosures.

Moody's on Thursday said it does not expect a housing recovery to begin until well into 2009 at the earliest. It also raised worries about the credit issues facing the industry. Moody's said it also "expects homebuilders to face growing resistance from lenders when requesting financial covenant waivers or amendments, making violations harder to resolve."

If home prices don't recover until late 2009, then that likely means more impairment charges for publicly traded homebuilders. But even if impairments have ended, builders today are still reporting losses, as evidenced by the Centex and Pulte results.

Now that the Fed cut mania is over -- and the rate cuts haven't even helped the builder stocks -- investors would be wise to pay close attention to the deteriorating fundamentals of the group.

Know What You Own: Among the stocks tracked by the SPDR S&P Homebuilders ETF are Centex and Ryland as well as Hovnanian HOV, KB Home KBH and Lennar LEN.