Andrew Gordon at Investor’s Daily Edge says “the crap is about to hit the fan” for homebuilders.

The housing market has been tumbling for some time now, but the squeeze in credit is now making matters a whole lot worse. There are two clear indicators of this: 1) They’re cutting dividends; 2) They’re selling off homes at “fire sale” prices.

The government isn’t stepping in to save these guys. Andrew says now is a good time to short the SPDR S&P Homebuilders ETF (AMEX:XHB)

More from Andrew:

The housing market has been going down for a couple of years. But the monthly numbers keep getting worse.

August housing starts dropped to a seasonally adjusted annual rate of 895,000. That’s the lowest it’s been since back in early 1991, and 6.6 percent of all loans are at least a month past due. And sales of pre-owned homes fell by 2.2 percent in August. OUCH.

Most homebuilders haven’t been profitable since 2006. But it wasn’t until recently that they flashed two clear signs of desperation.

• They’re cutting dividends. Lennar (NYSE:LEN), the biggest homebuilder in the U.S., cut dividends by 75 percent last week. More dividend cuts will come from the sector.
• They’re selling their property at fire-sale prices. That makes them even more desperate than banks. Banks refused to sell their toxic debt at huge discount prices. That’s a big reason why the government had to step in and offer to buy this stuff at higher prices than what they could get from the private sector. Horton, for example, recently sold a San Diego property for 25 cents on the dollar.

Yes they’re getting tax-refund checks from Uncle Sam for the losses they take on these sales. Still, healthy, or even semi-healthy companies don’t sell their property for pennies on the dollar unless they’re in dire straits.Even homebuilders themselves see tough times ahead. Here’s what Lennar said:

“While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards.”

I believe that housing will remain “constrained” much longer than through the third quarter.  I think the third quarter of next year is more like it, especially with foreclosures increasing and driving down prices.

In a middle-class neighborhood in South Florida, not far from IDE’s Delray Beach office, you can buy pre-owned homes in foreclosure for less than $85,000. Why would anyone buy more expensive new homes when they could just buy a foreclosed one at a steep discount?

And the credit freeze that occurred right after Lehman fell is killing home builders. One of these days credit is going to thaw, and I hope it’s sooner rather than later. But banks won’t go back to their free-wheeling lending days, and in the meantime it’s extremely difficult to get home loans.

Morningstar says, “It’s likely that these home builders are going to enter an even more difficult period in terms of cash generation.”

O’Donnell /Atkins, a real-estate advisory firm in California, says, “There’s going to be a rash of builders shedding assets.”

Prudential Realty in California, says, “The downside is they are never going to see the kind of margins when lots were doubling and tripling in value in the time it took to build a house.”

Banks are hogging the headlines but home builders are in big trouble. The 20 percent they’ve dropped so far this year is nothing (the blue line above is the Spyders home builders ETF – XHB). It’s only half of the banks’ drop.

Like every other sector, home builders are having a terrible October. Unlike other sectors, there’s nothing to save these companies from doubling and perhaps tripling those losses.

Most likely, a falling market has taken a big chunk of change from you. Here’s a way to get it back. All you have to do is short these companies or the home builders ETF.

Source: Next Shoe to Drop