Whether they'd admit it or not, the best cyclical companies' management, staff, and even shareholders would trade 12 or 24 months of abysmal financial performance for a telepathic ability to know whether they'll endure, period.

John McManus Photo: Katherine Lambert An important question to ask about our 17 public home building companies' financial performance (see the "2008 Public Builder Report Card," page 32) is this: Will it be a) their worst year, b) their second-worst year, or c) their third-worst year in the current real estate cycle? If the answer is the highly unlikely "a," then we can expect the wheels of revisionist history to start cranking into gear with positive spin by calendar Q4 of 2008. There'll be a "spring selling season" after all in 2009.

If a year-on-year nosedive from peak in 2006 back to 2002 or 2003 levels–decelerating in their tailspin maybe, but still dropping–is what it takes to stanch and correct the speculative flow of worldwide excess liquidity into U.S. residential real estate, most public home builders would give back an amount of their paper profits of the past three years to know the worst was over, and that they could start selling homes again. If the answer to the question, however, is "c," look out! That eventuality would continue to savage our public home builder universe from 22 companies in 2007 to 17 this year, to low double-digits by next year. What's more, two worse years–financially–than this one might finally end the sometimes entertaining and always feisty debate on whether home building operations and public equity markets should have anything to do with one another at all.

What seems to be the common denominator when things go wrong when the public owns a significant portion of a home building organization is that management says "yes" when they should say "no." Their capital structures, loaded with access to money that's cheaper to use than bank loans, suddenly reveal all the strings attached to the money. Those strings can make access to cheaper capital much more expensive at the end of the day, because it pressures less intelligent management behavior.

What management at the best privates has contended all along–even when money was cheap–is that the interests of public finance and home building operations run dramatically at odds by nature. One set of interests needs constant growth; the other needs to know when to say "no" and when to simply strive to be better rather than bigger.

While almost all 17 companies–which suffered collective losses of 37 percent of home building revenues year-over-year, 34 percent of closings, and 60 percent of backlog dollar value coming into the still-stiff headwinds of 2008–deserve encouragement for maintaining the wherewithal to keep the lights on, only one–NVR–broke ranks early enough in the growth game to stand as a clear winner today.

What a mostly more sophisticated senior management has done for our set of 17 intrepid public companies is this: They've managed mostly to pay all the bills and then some; and they've managed mostly to zero out the kind of debt that can choke their more meager earnings.

Meanwhile, give them all a hand on a few scores. These 17 public companies did manage to close 230 thousand homes, driving $70 billion in home building revenues, and, on average, harvested a cash on hand war chest of $400 million, even as they paid down maturities and renegotiated terms with lenders, materials suppliers, and trades. They booked more than $11 billion in backlog for 2008. They've proven to be a rugged crew to date. Now, with the prospect of volumes getting a bit of a lift here and there, with the prospect rates and legislation driving some mark-to-market transactions, and with the prospect that senior management gets a bit of a charge out of leading their companies through hard times as well as booms, we're going to see which companies will bump and which will run in the days ahead.