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Technical Olympic USA Inc. (TOA) is a homebuilder in a fight with a bank (Deutsche Bank AG (NYSE:DB)) over loan covenants and provides a good view of how fast this issue (land write-offs, underperformance) can affect a builder!

Technical Olympic Chart 9 11 06

As I said last month, look for the fastest growing builders and assume they overbought at the top!

Hovnanian Enterprises Inc. (NYSE:HOV) goes the builders one better by projecting an actual LOSS for the current quarter! "Our financial results for the fourth quarter continued to be negatively impacted by high cancellation rates and increased use of concessions and incentives, particularly on the resale of those homes which experienced contract cancellations," said Chief Executive Ara Hovnanian in a statement.

Of 11 analysts who track Hovnanian, only 1 had them listed as a sell with Citigroup Inc. (NYSE:C), Deutsche Bank AG (DB) and Goldman Sachs Group Inc. (NYSE:GS) all still listing them as a buy. Bank of America Corp. (NYSE:BAC), who had them at neutral, expected earnings of $1.05 a share vs. new guidance of a $1.96 per $28 share loss!

Hovnanian Chart 9 11 06

Citigroup is taking down the year estimates to $2.24 (less than they made in the first half) from $5.11, a far cry from last year's $7.16 when the stock was trading at $73 a share in an Exxon-like spike in July.

Hey, this doesn't stop people from buying General Motors Corp. (NYSE:GM), so why should HOV worry?

Big trouble spots for HOV seem to be Florida, Orange County and San Diego where 35% of the people under contract walked away from their deposit rather than take delivery of the homes.

Net contracts for the quarter were 3,100 -- a whopping decline of close to 40%.

"One reason cancellations are so high is that people think they can get the same house cheaper if they just wait a week or two," said M.D.C. Holdings Inc. Chief Executive Larry Mizel

Standard & Poor's Equity Research analyst William Mack maintained a "Sell" recommendation on shares of Hovnanian following the announcement. He lowered the target price on the stock to $22 from $24.

"We think these write-downs, unprecedented for Hovnanian in magnitude, reflect huge inventories of existing homes and poorly timed land purchases by the company," the analyst wrote in a research note to investors.

Read all of Phil Davis's articles on Seeking Alpha

Source: How to Short Homebuilders: Look for the Fastest Growers