Lot Write-Downs to Continue?

On the heels of Hovnanian's $638 million loss for fiscal year 2007, Bloomberg's Jonathan Weil thinks (in an opinion piece) that the large gaps remaining between builders' stock prices and book values (or assets minus debts) implies future impairments to come:

Eight of the nine U.S. homebuilders with market values of at least $1 billion now trade for less than their book values. Some like Pulte already have taken large writedowns on everything from real estate and joint ventures to goodwill. Yet their plunging stock prices indicate bigger charges to earnings may be needed.

Under the accounting rules, companies mainly use internal estimates of future cash flows to test whether assets such as real estate may be impaired. If the values aren't supportable, companies must write down the assets to their so-called fair values, though these may be only loose guesses.

Pulte is one of five companies in the Standard & Poor's 500 Homebuilding Index; the others are Centex Corp., D.R. Horton Inc., KB Home, and Lennar Corp. While the five companies have a combined book value of $22.7 billion, the stock market says they're worth just $15.2 billion. Put another way, the market is signaling that their net asset values are inflated by more than $7 billion, mostly because of frothy inventory values.

Oddly, Wall Street analysts covering the stocks appear to be rejecting the market's hints. Pulte, for instance, is expected to post a $153.2 million fourth-quarter net loss, according to a Bloomberg survey of seven analysts. That suggests no one is counting on major writedowns. The loss would be much larger if Pulte were to mark its assets in line with what its stock price implies...