Based on a review of the 33 U.S. homebuilders with more than $10M in revenue, more than 30 percent are in financial distress and in danger of filing for bankruptcy, according to an analysis by Grant Thornton Corporate Advisory and Restructuring Services.

"It's striking when you see just how much cash flow has continued to decline for the better builders," said John Bittner, partner at Grant Thornton Corporate Advisory and Restructuring Services. "This year it will be all about keeping cash flow positive by cutting operating costs and liquidating assets. It'll get to a point, however, when builders get rid of the assets with the most value and expenses can't be cut much further. After that, there's not much they can do except wait for a turnaround in the housing market."

Records show 143 U.S. homebuilders filed for bankruptcy last year versus 80 in 2007. To remain viable, many will be forced to continue to reduce expenses and cut prices on existing inventory to increase cash flow, in contrast to their previous focus on revenue growth for the better part of this decade.

"It wouldn't surprise me to see one or two of the top 10 homebuilders filing this year," said Bittner. "But in most cases, the current lending environment is unique in that as long as a builder has positive cash flow, the lender doesn't want to foreclose or force a bankruptcy filing. Recovery is more likely if a bank can be patient with a borrower. Positive cash flow and ability to service interest on a credit facility provides for a better negotiation position with the lender."

According to Grant Thornton principal Tim Skillman, southern California and Florida are key markets to watch for evidence of a national turnaround.

"We won't begin to see a recovery until these regions bottom out," he said. "The indicator will be not the quantity of sales, but the median price of homes sold."

Skillman believes expense reduction will be critical. Average revenue per homebuilder declined to $1.9M last year versus its peak at $3.7M in 2006 - a nearly 50-percent drop. Homebuilders that significantly scale back new-land purchases and maintain both positive cash flow and maximum cash balance on hand will be in an improved position to combat distress.

"In this recession, the decline in housing starts up to this point has been largely a result of the contraction in the financing market," said Skillman. "With unemployment rates rising across the country, we could see a 'double dip' in housing starts and home prices."