Value hunters, beware: Homebuilders may be cheap, but you need to be comfortable with two years of potentially rocky fundamentals.

The super-bear case calls for some builders to see a 50% to 90% drop in earnings from now until 2008, as higher land expenses crush margins.

Such doomsday numbers come from Bank of America analyst Daniel Oppenheim, who has been one of the most bearish homebuilder analysts of the past year.

For instance, Oppenheim projects that

KB Home

(KBH) - Get Report

, which he rates neutral, will earn $1.15 a share in 2008. Last week, the company

reduced its guidance for 2006, saying it should post earnings of $10 a share for the year.

KB's stock trades around $45, which appears cheap at 4.5 times this year's projected earnings. But if Oppenheim is to be believed about 2008, then the stock is trading at 39 times his estimates for that year. (He expects EPS to fall to $4.50 in 2007.)

Oppenheim's pessimism stems from his belief that builders' margins will deteriorate significantly from the double whammy of home-price erosion and higher land costs that will be expensed over the next few years.

Most builders have yet to acknowledge this issue, Oppenheim says.

When a public builder purchases land, it typically capitalizes the cost on its balance sheet, but most of the cost doesn't get expensed on the income statement until houses that are located on that land are sold. From 2003 to 2005, the housing boom resulted in ballooning housing prices (a good thing for builders) but also lofty land prices (not such a good thing). During this time, builders bought a significant amount of land at high prices, although it's not easy to tell how much because such investments are usually not broken out in financial filings.

Over the next few years, builders will use much of their newly purchased land for new housing communities. At that point, this pricey land gets expensed and margins will deteriorate at builders, Oppenheim says.

Oppenheim expects KB Home's revenue to be $10.5 billion in 2008, down from $10.8 billion this year (he projects $10 billion in 2007). But he expects the builder's 2008 operating margin to drop to 1%, down from 12% this year and 14% in 2005.

Such a scenario is playing out at most builders, he says. He rates

Toll Brothers

(TOL) - Get Report

a sell and expects the builder's EPS to decline from $4.65 this year to $3.29 in 2007, and to $2.31 in 2008. For

Pulte

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, Oppenheim expects 2006 earnings of $4.50 a share, with a drop to $3.30 in 2007 and $2.50 in 2008.

Of course, not everyone is so gloomy.

"There is much consternation on the Street regarding future costs, particularly land, in a flat pricing environment. We believe that consternation has led to too much pessimism on margins," wrote Susquehanna Financial Group analyst Stephen East in a recent research note. He expects KB's earnings to increase slightly to $10.16 in 2007, and he rates the stock a buy. (Both Bank of America and Susquehanna Financial have provided investment banking services to KB Home.)

"Land cost pressures will likely be the greatest this year, and then start easing -- not accelerating -- sequentially," East says. "Furthermore, one can expect all builders to lean heavily on subcontractors for cost reductions. Remember, all costs are fixed in the short run and variable in the long run."

East doesn't yet have estimates for 2008 but says that as long as the economy doesn't fall into a recession, homebuilders should have a decent year.

But he admits that all forecasts might be premature at this point.

"I don't think anybody, including the builders themselves, has any good idea as to what 2007 looks like."

On its earnings call last week, KB Home management was asked about whether this year or future years would see the biggest margin impact from land expenses. Jeffrey Mezger, the company's chief financial officer, said this year is "probably the largest year for land going up." Finished lot costs will rise 20% at the company this year, he said, and 7% housing price increases are needed to cover such land costs. "That's coming down significantly next year," he added.

The company didn't respond to a call seeking more information. Like most builders, KB Home doesn't specifically break out how much land it purchased in recent years.

East believes KB Home's management that this year is likely to be the worst in terms of the impact from land expenses. One reason he cites is that the average age of KB Home's owned land is two years or less, by his estimate. Since 2004 and 2005 represented the biggest year-over-year jumps in land prices, such lots are just now hitting the company's income statement.

"I think once we get into '08, that situation moderates pretty meaningfully for most builders," East says.