The housing situation in the US may be getting bad enough so that one or more of the major home builders could face Chapter 11, especially if the downturn goes deep into 2008.

Bloomberg writes that "at least five of the top 15 homebuilders by revenue are burdened with too much debt, Agency Trading’s Barron said. They are Hovnanian (HOV), California-based Standard Pacific(SPF), WCI (WCI), Beazer Homes (BZH), and TOUSA Inc (TOA)."

“We would not be surprised to see one or more of the larger homebuilders become insolvent if current pricing trends persist into 2008,” Mark A. Morgan, senior equity financial analyst with New York-based Rochdale Securities LLC. Some media reports already indicate that several of these companies are in negotiations with their banks to improve payment terms on debt.

But, banks may not be able to help the larger homebuilders, especially in a market where investors are watching the banks themselves. Huge write-offs at Citicorp (C) and other big US financial companies have put pressure on managements at the firms to be more prudent.

If share price fall-off is any indication, Beazer and Standard Pacific are the most likely homebuilders to file for bankruptcy. While shares in most of the larger companies in the sector are off about 40% over the last year, shares in these two firms are down closer to 80%.

If one company files for Chapter 11, does it cause a huge shareholder stampede out of all of the others? Probably. Which means by early 2008 stocks in all of these companies could all be down by 80% from their late 2006 peaks.

Douglas A. McIntyre

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