The home building research team at Credit Suisse, led by senior analyst Ivy Zelman, is out with a report today (May 10) that stops a step short of revising downward its bearish estimates of last October regarding impairments taken on land holdings.

"Our original impairment analysis was predicated on land prices falling back to 2003 levels (down 27% from 2005), or a 10% decline in home prices," stated Zelman and company. "Given recent data points highlighting a further sharp decline in absorptions and pricing, as well as a lack of meaningful charges yet to be taken in certain key markets, we ponder whether we were bearish enough in our original estimates."

The report comes on the heels of the announcement of preliminary results from Toll Brothers for its fiscal second quarter. Toll CEO Robert Toll stated that the company will take between $90 million and $130 million in asset impairments when it announces earnings on May 24. Credit Suisse estimates the total value of impairments taken by the large public builders since the housing downturn began at $4.4 billion.

The Credit Suisse team presented a scenario in which its estimates, first published in a research note entitled "Wonder-Land" last October 3, could be revised downward to the point at which builder stocks would be trading at a 14% premium to book value, implying therefore that they could fall by at least that much. Today's report said, "We do not believe investors should compare write offs taken by builders across the group, but should instead consider each builder's write offs to the total land investment separately.Under this premise, we still believe that our builder universe will not only reach our 16% estimated hit to tangible equity, but that if the slow absorption pace and pricing pressures reported in our most recent survey continues, the probability that it will exceed this bogey increases with each incremental month of weak results. While we are currently maintaining our estimates that land prices, on average, will return to 2003 levels (27% decline from 2005 prices), [we provide] a sensitivity analysis demonstrating the impact to the builders' tangible book values if land prices rolled back to 2002 prices (36% decline from 2005 prices)."

Doing so "would imply that the stocks are trading at 1.6x adjusted tangible book value, a 14% premium to our fair value estimate of 1.3-1.4x book value," said the report.