Analyst note: Homebuilders face headwinds

Major building stocks have shed 29 percent since mid-May, badly underperforming the broader market, as measured by the S&P 500 index, which is off 10 percent since then.

"We believe the group's pullback is not only justified by deteriorating fundamentals, but also point to several incremental risks that have begun to emerge," Rehaut said.

The first is the slackening of some down payment assistance programs that aim to help potential buyers qualify for mortgages. Rehaut says those have become essential in the past 18 months, but legislation may modify or curtail some programs.

Another reason is that homebuilders' cash flow is likely to flatten or fall over the next 18 months as revenue continues to decline. The companies are still making sales, but at cut-rate prices and at volumes that do not generate enough cash to cover operating costs.

The last is higher interest rates for mortgages, creating a major impediment to buyers' getting loans at a time when lenders have already tightened the terms of borrowing.

"We believe these items represent incremental risk to the industry and the companies and further add to our negative stance on the group," he said.

Housing stocks turned positive in late trading Tuesday after spending much of the day lower. The rebound comes after several days of major losses, spurred by further negative industry data and company reports.

(This version CORRECTS the story to note that according to the analyst, DPA programs are not running out money and that homebuilders are not having trouble generating positive cash flow.)