A review of the 33 U.S. home builders with more than $10 million in annual revenue found recently that more than 30 percent were in financial distress and in danger of filing for bankruptcy.

Grant Thornton Corporate Advisory & Restructuring Services, part of Chicago-based Grant Thornton LLP, performed the analysis. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd., a global audit, tax, and advisory conglomerate that serves public and private clients in more than 100 countries.

"It's striking when you see just how much cash flow has continued to decline for the better builders," says John Bittner, a partner at Grant Thornton. "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 that 143 U.S. home builders 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 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 home builders filing this year," Bittner says. "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."

Tim Skillman, another Grant Thornton principal, says Southern California and Florida are key markets to focus on to watch for evidence of a national turnaround in housing.

"We won't begin to see a recovery until these regions bottom out," he says. "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 home builder fell to $1.9 million last year, down nearly half from a peak of $3.7 million in 2006. Home builders who 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, he says.

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

Grant Thornton's Corporate Advisory and Restructuring Services unit launched its U.S. practice in 2007 and now includes more than 90 professionals in 11 offices.