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Which Builders Are Best Prepared to Weather the Storm?

Our new rankings should help investors sort potential winners and losers.

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It's hard to imagine a group more out of favor in today's market than homebuilders, and for good reason: The headwinds are both well known and strong. Vacant homes for sale are at an all-time high, both in absolute terms and as a percentage of total households. Affordability problems pervade most of the glamour spots such as California, Las Vegas, Arizona, Florida, and Washington, D.C., resulting in a weak pricing environment in the very regions where builders used to make virtually all of their money. Expensive land will flow through the industry's collective income statement for the next couple of years, eliminating the immense profits previously earned through appreciating inventory. Subprime financing has dried up completely, eliminating an entire tranche of buyers that as recently as February was able to obtain financing on relatively easy terms. And several variable-rate Alt-A loans (the category sitting between prime and subprime involving high loan/value loans with little documented income or assets) will soon reset to levels at which the borrower wouldn't have been approved in the first place.

Indeed, it's likely this year's total housing starts of less than 1.5 million will be down by about 30% from the peak of 2.1 million in 2005, and next year's production may even be slightly lower. It's really anybody's guess.

Eric Landry does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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