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Lennar Gets Hammered

Builders' stocks are nailed on more weak numbers.

Updated from 10:31 a.m. EDT

Lennar

(LEN) - Get Report

reported a steep third-quarter loss and said it plans to continue making sharp reductions in its workforce because of the dismal housing market.

Lennar lost $514 million, or $3.25 a share, for the third quarter ended Aug. 31, reversing the year-ago profit of $207 million, or $1.30 a share. Analysts expected a loss of 55 cents per share. Homebuilding revenue fell 44% from a year ago to $2.2 billion.

On a conference call, CEO Stuart Miller said the housing market got worse throughout the quarter. He told investors the recent interest rate cut by the

Federal Reserve

will begin the process of helping the market, but it "most certainly will not be a panacea for conditions as they exist."

The problem is that "supply and demand has continued to shift more rapidly than expected," he said.

In the last quarter's conference call, Miller said three things need to happen before the housing market gets better -- inventories of both new and existing homes need to stabilize and then be absorbed, mortgage markets need to settle and consumer confidence has to be restored.

However, none of these have yet occurred, he said.

The loss for the third quarter throws another wrench into the hopes of investors in the homebuilding sector. The news comes on the same day as the S&P/Case-Shiller Index showed home prices fell 3.9% in July from a year ago in the largest 20 U.S. cities.

Meanwhile, the National Association of Realtors said existing home sales fell 4.3% from July to August to an annualized rate of 5.5 million units, matching economists' expectations.

Total housing inventory rose to a 10-month supply at the current sales pace in August, up from a 9.5-month supply in July, NAR said. A total of 4.58 million homes were for sale across the country at the end of last month, the highest level ever.

As prices for new and existing homes decline, builders are finding that they cannot sell homes for a profit because they purchased too much pricey land in recent years during the housing boom.

Lennar's latest quarter was hit by $848 million in valuation reductions and write-offs. As aggressive price cuts have become the norm in the industry, homebuilders are being forced to write down the value of communities under development. The net result is that builders are selling many communities for a loss, only to raise immediate cash.

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The company's homebuilding operations showed a loss of $788 million in the latest quarter. Home deliveries fell 41%, new orders slid 48% and quarter-end backlog tumbled 60%. Lennar said its average selling price dropped to $296,000 from $316,000 a year ago, as incentives rose.

"Heavy discounting by builders, and now the existing home market as well, has continued to drive pricing downward. Consumer confidence in housing has remained low, while the mortgage market has continued to redefine itself, creating higher cancellation rates," Miller said in the company's press release detailing its results.

Miller said the company has responded by continuing to adjust pricing to meet current market conditions in order to keep inventories low. "The net effect has been a continued deterioration of our net margin and accordingly, higher impairments to our inventory," he said.

The company has reduced it workforce to date by approximately 35% and expects continued reductions in the fourth quarter.

Lennar's aggressive price cutting is on display in Port St. Lucie, Fla., where the company is offering discounts to move townhomes at its Newport Isles development.

Florida realtor Mike Morgan says Lennar is offering a 2,200-square-foot townhome for a listed price of $215,000. However, he says a Lennar salesperson said an offer of $195,000 might be accepted.

Across the street, privately held Prime Homebuilders is offering a similar unit that is 1,600 square feet but with a price tag of $250,000 at its Portofino Court project.

Lennar fell $1.04, or 4.3%, to $23.14 after earlier hitting a 52-week low at $22.53. Rival homebuilders were hit hard as well, with

Toll

(TOL) - Get Report

down 1.8% and

Hovnanian

(HOV) - Get Report

off 4%.

"This was the highest level of impairments any quarter for Lennar in the current downturn, likely a function of the price declines resulting in more communities that are teetering on the brink of profitability," Bank of America analyst Daniel Oppenheim wrote in a research note.

Oppenheim expects significant impairments across the industry in the third quarter.