Updated from 10:19 a.m. EDT

Lennar

(LEN) - Get Report

posted a big drop in first-quarter numbers and withdrew its earnings goal for the year, saying new orders are being hurt by problems in the subprime lending market.

Shares of the homebuilder recently were down 97 cents, or 2.2%, to $43.57.

The Miami-based company earned $69 million, or 43 cents a share, for the quarter ended Feb. 28, down from $258 million, or $1.58 a share, a year earlier. Sales slid to $2.79 billion from $3.24 billion a year earlier.

Analysts surveyed by Thomson Financial expected a profit of 43 cents a share and sales of $2.49 billion.

While the earnings met expectations, the company's new orders fell sharply, disappointing some analysts.

First-quarter net orders fell 27% from a year earlier, much worse than the 2% increase that Bank of America analyst Daniel Oppenheim expected. The large order drop came despite the fact that Lennar is offering aggressive incentives to move homes.

Orders were weakest in the Central region, dropping 34% from last year. This region includes Arizona, Colorado and Texas.

To put the decline in perspective, over the past year Lennar has been drastically reducing prices on its homes to clear inventory and using the proceeds to pay off debt and strengthen its balance sheet.

Incentives represented 13% of the average selling price for home closings in the first quarter, matching last quarter but rising from 4% a year ago, Oppenheim said in a research note Tuesday. If management attempted to limit incentives at 13% of orders in the quarter, it may have resulted in the weaker numbers, he said.

For its part, Lennar said the housing market continues to show overall weakness.

"While some markets are performing better than others, the typically stronger spring selling season has not yet materialized," Lennar CEO Stuart Miller said in a statement.

"These soft market conditions have been exacerbated by the well-publicized problems in the subprime lending market," he said.

Lennar's news provides further evidence to back up the theory that the subprime mortgage meltdown that has crippled companies like

New Century

(NEWC)

and

Accredited Home Lenders

( LEND) will have a meaningful spillover effect on new-home sales. Oppenheim believes that the lending situation may get worse for homebuilders.

"Our sense is that the tougher lending environment would have only started at the end of the quarter so that the impact will be more significant next quarter," he said.

On the company's conference call, Miller said that while these are already "difficult times for the homebuilding industry," it is "unclear today whether there is another shoe to drop."

Questions remain about whether the declining housing market will create a U.S. recession or whether the capital markets will dry up and reduce overall liquidity, Miller said.

He also highlighted the growing payment shock that homeowners are facing as adjustable-rate mortgages reset higher.

"The resetting of rates is creating payment stress concurrent with home prices falling and equity evaporating," Miller said. The worry among industry observers is that this could increase the supply of homes on the market at a time when lending underwriting is tightening.

"Although we see some sporadic indications of firming in some markets....the reality is that market conditions are still challenging at best," Miller said.

Lennar said that given these conditions, it doesn't expect to achieve its previously stated 2007 earnings goal, and it's not comfortable with providing a new projection.

In January, Lennar gave an upbeat, yet

seemingly unrealistic, earnings guidance for the current fiscal year. The company at that time said its fiscal 2007 earnings could meet or exceed its 2006 profit of $3.69 per share, compared to the then-Wall Street estimate of $2.61.

Lennar's target was unrealistic because it was based on a long string of conditions that had to be met. It required that strong employment continues, low interest rates stay low, the economy stays healthy and the market for new homes demonstrates traditional seasonal improvement.

Since then, defaults have risen on subprime and Alt-A mortgages, and the spring market for new homes has been weak.

Meanwhile, data released Tuesday shows home prices fell 0.2% in January from a year ago in the 20 largest metro areas of the country, according to the S&P Case-Shiller Index. A year earlier, the index had a 14.7% year-over-year gain.

"The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market," says Robert J. Shiller, chief economist at MacroMarkets.

Detroit and Boston had price declines of 6.9% and 5.6%, respectively. Seattle and Portland were among the better markets, with respective rises of 11.1% and 8.7%.

Shares of other homebuilders were lower after the reports.

KB Home

(KBH) - Get Report

was down $1.29, or 2.8%, to $44.70;

Toll Brothers

(TOL) - Get Report

slipped 73 cents, or 2.5%, to $28.12; and

Hovnanian

(HOV) - Get Report

fell $1.19, or 4.4%, to $26.15.

MDC Holdings

(MDC) - Get Report

tumbled 3.6% after the builder was downgraded by Matrix Research.