Coming soon to a neighborhood near you...

More vacant homes!

The top five [home builders] have almost $13 billion in commitments to local authorities, having promised to build the necessary infrastructure for new housing developments. They back these commitments with surety bonds, which are pledges to pay a municipality a big slug of money if a builder doesn't finish a project. These surety bonds total between a quarter and a third of the book value of the leading home builders. Centex's $6 billion of surety bonds actually exceeds its book value, though it estimates it has just $2.5 billion of work left to complete. In a recent regulatory filing, Lennar revealed it had $1.8 billion of these commitments. However, they won't affect its balance sheet unless they are triggered.

The surety bonds make it tough for home builders to walk away from projects. With land prices falling, disposing of development land and dealing with surety bond commitments is costly. This leaves home builders with one option -- to keep building. But that's not appealing either, as home sales are falling and inventories keep rising. In more than one way, the builders have dug themselves a hole.