Which 10 companies should you keep out of your portfolio? Find out in our special series on the Worst Stocks for 2009.

From the outside, it's the epitome of the American Dream. On the inside, however, it's a house of horrors. I'm talking about homebuilder Hovnanian Enterprises (NYSE:HOV), builder to the country, with communities under construction all over the nation. It's also my selection for the Worst Stock of 2009.

Back to the future
You can argue that Hovnanian is the perfect poster child for housing's malaise. In mid-2005, the stock peaked at $72 a share. Today:

  • The stock today trades at just 1/40th of that price, at about $1.80.
  • Mortgage rates remain low.
  • The Federal Reserve recently slashed key interest rates to record lows, between zero and 0.25%.
  • December witnessed the largest jump in home sales in nearly seven years, but apparently not of new homes.

Back in October, my Foolish colleague David Lee Smith said that if housing were to recover, Toll Brothers (NYSE:TOL) might be the company to lead the way out. It had the best cash-to-debt position of any of the builders. Even though Hovnanian has been improving its cash position from a low of $1 million on Jan. 31, 2007, it is still on shaky ground. Take a look:

Builder

Cash

Debt

Equity

Hovnanian

$838

$2,600

$330

Beazer Homes

$584

$1,750

$375

Centex (NYSE:CTX)

$1,260

$3,100

$1,970

KB Homes (NYSE:KBH)

$1,250

$1,940

$861

Meritage Homes (NYSE:MTH)

$119

$629

$605

Palm Harbor Homes

$30

$276

$121

Pulte Homes (NYSE:PHM)

$1,170

$3,500

$3,180

Ryland Group (NYSE:RYL)

$345

$784

$784

Toll Brothers

$1,630

$2,140

$3,240

Source: Capital IQ, a division of Standard & Poor's. All amounts in millions.

And it will get worse, because no one seems to be buying new homes anymore.

If I had a hammer ...
With its fiscal fourth quarter, which ended on Oct. 31, Hovnanian reported its ninth consecutive quarter of net losses and its seventh straight quarter of operating losses -- and that doesn't include the asset writedowns that Hovnanian and all of the other builders have been taking over the past couple of years. Further, net contracts -- new contracts minus cancellations -- dropped by more than 54%, and their average prices fell by 9.3% in the quarter, compared with a year ago.

The Commerce Department says new-home construction fell by 15.5% in December, much worse than what economists had forecast. Coupled with a greater than 10% decline in building permits -- considered a leading indicator of future housing activity -- housing's foundation is shakier than it looks.

Some builders want to jump-start home sales with enticing mortgage terms. Toll Brothers is offering 3.99% financing on 30-year mortgages, with no points. But the terms are pretty stiff. First, as the car dealers like to say, you need to be "well qualified." You need a credit score of 720, you have to cough up a 20% down payment, and you can't borrow more than $417,000. Oh, and you'll probably need to sell that home you already own. How's that working out for you?

In today's market, it's just not happening. Despite a healthier financial position than at the start of 2007, Hovnanian is caught in a crisis only partially of its own making. The Census Bureau reports that square footage is shrinking, and the National Association of Home Builders says 88% of builders surveyed this month are planning to build smaller homes. Both situations translate into lower home prices. Just because some stocks have already incinerated millions of dollars in shareholder value, that doesn't mean you still won't be throwing away your savings by buying in here.

... I'd nail the coffin shut
This takes just three nails.

  • Ben Bernanke, in a speech a little more than a month ago, said that 4.5% of first-lien mortgages are more than 90 days past due or in foreclosure and that 10% of near-prime and 20% of subprime mortgages are delinquent.
  • The unemployment rate rose above 7% in December, and rising joblessness will probably lead to even more foreclosures.
  • The next housing time bomb is set to go off later this year, when the resetting of option ARM interest rates kicks in.

It's not a question of who wants to buy a house, but who is able to. Nor is it a question of "Why buy this stock?" but rather "Why are they still building houses?" If you look at it that way, and given the data, the case for making Hovnanian the worst stock for 2009 is easy.

If you agree that Hovnanian is the Worst Stock for 2009, leave a comment below telling us that you would put a thumbs-down on the company. Of course, if you disagree, then cast your vote below, saying that the company will outperform.

In the meantime, peer through housing's windows with these Foolish articles:

Meritage Homes is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.