Skip to main content TV Recap: Taking Toll of the Homebuilders

Hovnanian's optimism doesn't make sense, Cramer says, but Toll Brothers is 'fantastic.'

"Hovnanian (HOV) - Get Hovnanian Enterprises Inc. Class A Report is a poorly run company that has been optimistic the whole way, which doesn't make a lot of sense," Jim Cramer said on TV's Wall St. Confidential Web video Friday.

Meanwhile, Bob Toll runs a fantastic company,

Toll Brothers

(TOL) - Get Toll Brothers Inc. Report

, which has not been optimistic, he said.

Hovnanian's balance sheet has been very bad, and the company needs to see a bottom in housing in order to be able to stay solvent, Cramer said. Therefore, he believes, anything the homebuilder says must be discounted. It continues to build homes and be in bad areas, he said. "They need to scale back."

Cramer said Hovnanian is like

D.R. Horton

(DHI) - Get D.R. Horton Inc. Report


Pulte Homes

(PHM) - Get PulteGroup Inc. Report

. While Hovnanian is not as bad as

Beazer Homes

(BZH) - Get Beazer Homes USA Inc. Report


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KB Home

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, it's "clearly nowhere as good as Toll," he said.

"Housing across the board is going down," Cramer said. With the big three-day sales event Hovnanian is planning for Friday through Sunday in California, "they are really risking the company," he said. "If they do not get a lot of houses sold, they'll clearly then mark down their inventory."

In the housing industry, "if there is a lot that you know you're going to build a house on and you can't get your money back from the cost of the lot and the cost of the home, you have to impair," Cramer explained. "When you impair, you write down the book, write down the equity, and you can then trigger a revolver not having to be paid back by the banks."

Right now this is prevalent among the homebuilders, he said. Plus, there are a lot of homebuilders that offer high dividends.

"I think the homebuilding industry is not a big industry but has a lot of headline risk," Cramer said.

He said that people must read the Toll Brothers conference call because everything they need to know about how bad housing is is contained in that call.

At the time of publication, Cramer had no positions in stocks mentioned.

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