Homebuilders Are Stretched Thin

Even as demand falls and inventories rise, they're taking on debt to boost construction and keep up their heady growth

To the casual observer, the homebuilding industry appears to be in remarkably good shape this deep into the housing cycle: Most of the large publicly traded builders such as Lennar Corp. (LEN ) and KB Home (KBH ) are still reporting double-digit gains in both sales and profits. And most also still boast high returns on their investments. Los Angeles-based KB Home, for instance, is on a pace to earn 16% return on capital over the past year. "Other companies only dream about that," says KB Chief Financial Officer Dom Cecere.

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