The Big Bad Wolf is huffing and puffing at the homebuilders again. This morning, Centex (NYSE:CTX) issued a bleak outlook in its preliminary fiscal third-quarter report. The real estate developer expects a loss of $2 a share for the period.

The red ink flows from a series of charges. The company will take a $150 million hit as it walks away from land options, another $300 million punch to the gut in writing down the assessed value of its land, and a $60 million body blow in tax liability stemming from a federal tax audit. You can almost hear the company belt out, "Cut me, Mickey!" between each round of pummeling.

Excluding all of these charges, the real estate developer now expects to earn about $0.75 a share. That doesn't seem too far from the $0.81 a share that Wall Street is expecting

However, business is going to get worse before it gets better. The company is reporting a 12% dip in successful closings for the December quarter, but a 24% dive in new home orders. In other words, we can expect Centex's top-line declines to accelerate in the coming quarters.

Building a house of sticks and stones
It's easy to get cynical over the cyclical. Investors expect the housing sector to ultimately bounce back, and it's evident in their trading habits. Centex earned $9.67 a share last fiscal year. Analysts expect the company to earn just $2.97 a share next fiscal year. In other words, earnings will have plummeted by 70% in the span of two years (at the very least -- forward estimates are likely to head lower). That kind of debacle would crush your garden-variety growth stock. However, Centex is only trading 33% lower than its all-time high.

And no, Centex isn't the only one.

Last yr. EPS

Next yr. EPS

% Diff.

Share Price Decline

Lennar (NYSE:LEN)





Pulte (NYSE:PHM)










D.R. Horton (NYSE:DHI)





Source: Capital IQ

Housing stocks peaked between July 2005 and January 2006. In every single case, the stocks have surrendered merely a fraction of their bottom-line drops over the course of two years.

Investors who bought into the sector at the top thought they were getting a bargain. Single-digit trailing P/E ratios almost made housing stocks seem like bargain fodder. Let's hope that investors aren't making a similar mistake now by approaching the industry as a turnaround situation. They're too early, and the stocks are still too high. With the exception of Horton, the other four developers are trading between 18 and 20 times next year's earnings projections. That's pretty grim, given the likelihood of profit targets heading even lower.

Open houses can be broken homes
One can't rely on earnings multiples alone, of course. These are asset-rich companies. In a few cases, such as WCI Communities (NYSE:WCI) and M/I Homes (NYSE:MHO), the shares are trading for less than book value. However, Centex isn't the only company writing down the value of its assets. Until we hit bottom on hosed-down profits and book-value markdowns, look before you leap.

That said, there are several arguments in favor of buying in now. Developers are scaling back on new construction. This is also a highly fragmented sector, so the weakness will shake out the more paltry players. Consolidation may also result from the housing market's hard times.

The cushions are there. Unfortunately, the fundamentals haven't hit bottom. The publicly traded homebuilders are the sector's strongest players, yet they continue to show steeper drops in new home orders than deliveries. Companies might not resume growing their bottom lines until 2008 -- at the earliest.

Until then, speculators are simply trying their luck at catching falling knives. Unfortunately, those knives aren't coming from the kitchens of freshly built homes.

Bucking the trend to score a great housing deal, thanks to the glut of homes on the market? Check out our Home Center before you start hitting the open houses.

Longtime Fool contributor Rick Munarriz has been living in the same place since 1999 -- but he did refinance twice when borrowing costs got dirt cheap, only to pay off his home last year. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.