Pulte Homes ( PHM) and Beazer Homes ( BZH) became the latest builders to slash guidance amid a drop in earnings and orders as the U.S. housing market continues to slow.

Meanwhile, government data Thursday showed that sales of new homes came in lower than economists expected and inventories continued to spike.

Pulte said late Wednesday that its second-quarter earnings from continuing operations fell to $243.9 million, or 94 cents a share, from $305.2 million, or $1.16 a share, a year earlier. Analysts expected earnings from continuing operations of 90 cents a share, according to Thomson First Call.

Pulte's net income, which includes losses from discontinued operations, fell to $243 million, or 94 cents a share, from $303.7 million, or $1.16 a share.

Revenue rose 3% from last year to $3.36 billion, beating analyst estimates of $3.30 billion.

However, new orders -- a key predictor of a homebuilder's future growth prospects -- fell 30% to 9,455 homes from 13,581 a year earlier. Pulte's backlog was valued at $6.9 billion at the quarter's end, compared with a value of $7.8 billion a year earlier.

Pulte slashed its 2006 earnings projection to $4 to $4.30 a share, down from the guidance it gave in early June of $4.70 to $5 per share. Analysts, on average, had forecast a profit of $4.44 a share.

Beazer, meanwhile, said Thursday that its second-quarter profit fell to $102.6 million, or $2.37 a share, from $112.7 million, or $2.50 a share, a year earlier. Revenue dropped to $1.20 billion from $1.29 billion.

Analysts, on average, expected earnings of $2.35 a share and revenue of $1.32 billion.

The Atlanta-based builder posted a 16% drop in new orders to 4,378 homes from 5,202 a year earlier.

The company, noting that it doesn't expect housing conditions to improve in the remainder of the year, said it now expects 2006 earnings of $9.25 to $9.75 a share. Beazer's previous guidance called for earnings of $10 to $10.50 a share; analysts predict a profit of $9.60 a share.

Inventory Issues

On the company's conference call Thursday, Pulte's management said the biggest issue it's facing is that a large portion of buyers are waiting on the sidelines because they're seeing a risky housing market.

"How bad will it get and how long will it last?" management asked. "No one can answer these questions with any degree of certainty."

One major issue continues to be the huge amount of housing inventory for sale across the country -- particularly in California and Florida, Pulte said. For its part, Beazer posted its biggest order drop in the West and in Florida.

"Across the country, the housing markets that had experienced rapid price appreciation have seen significant increases in cancellation rates and resale home inventories," Beazer President and CEO Ian McCarthy said in the company's earnings release.

Elsewhere, the Commerce Department said Thursday that sales of new single-family homes for all builders across the U.S. in June fell 11% from last year.

New single-family houses in June sold at a seasonally adjusted annual rate of 1.13 million, which was down 3% from the revised May rate of 1.17 million. Economists expected a sales rate of 1.16 million. In June 2005, the annual rate was 1.27 million.

The seasonally adjusted estimate of new houses for sale at the end of June was 566,000. This represents a supply of 6.1 months at the current sales rate, which was down from the recent peak of 6.4 months on February but still 42% higher than a year earlier.

"In both the existing- and new-home sales market, we're seeing uncomfortable levels of acceleration in inventories," says Phillip Neuhart, an economic analyst with Wachovia.

To deal with the ever-slowing market for new homes, Pulte said it is dramatically scaling back its land investments, echoing recent comments from fellow builders D.R. Horton ( DHI) and Centex ( CTX).

The company experienced a 270-basis-point decline in its gross margin to 21.1% in the second quarter, partially dragged down by a $62 million write-off resulting from adjustments to land inventory and land held for sale. This charge includes the write-off of option deposits and preacquisition costs association with land transactions the company no longer plans to pursue.

Beazer, as well, recorded an $11 million pretax charge to write off land options in its second quarter.

Pulte said it has already scaled back its lot position by 10% since the end of 2005. This strategy could result in Pulte generating $500 million of free cash flow by the end of the year, management said. Incidentally, Centex predicted the same number in its call Tuesday.

In past years, builders generally have been cash-flow negative as they used almost every dollar of profit for land purchases.

Assuming flat to declining inventories next year, Pulte said its entire net income could be free cash flow in 2007, although the company didn't provided a profit estimate. Free cash flow will be allocated more toward share buybacks than land, Pulte said -- again echoing similar comments from D.R. Horton and Centex.

Pulte shares recently were up 23 cents, or 0.8%, to $30.28. Beazer shares were up 10 cents, or 0.3%, to $40.61.

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