D.R. Horton, Inc. this Tuesday reported a 37% drop in net orders for the company's fiscal second quarter ended March 31, from 15,771 last year to 9,983 in 2007, representing a 41% decline in revenue from $4.4 billion last year to $2.6 billion this year. The rate of cancellations of contracts on new homes was 32%, down from 33% in fiscal first quarter and 40% in the last quarter of fiscal 2006.

"Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high," said Donald R. Horton, D.R. Horton chairman. "Our cancellation rate is essentially unchanged from the prior quarter, but it remains above our historical range as we continue to see an increase in the use of sales incentives in many of our markets...the spring selling season has not gotten off to its usual strong start."

Regionally, orders fell across the board, down 27% in the Northeast to 1564; 30% in the Southeast to 315.7; 34% in the South Central to 2,734; 39% in the Southwest to 2,171; 59% in California to 1,107; and 28% in the West to 978.

Wall Street took the news in stride, with the building research team at J.P. Morgan Securities stating in a research note that it was "modestly disappointed" in the numbers but that since Horton's orders fell at a slower rate than the industry average in the second half of 2006 (-24% vs. an industry average of -37%), "[we] believe DHI is now catching up vs.the industry taking another leg down."

J.P. Morgan also noted the relative stability in the company's cancellation rate, stating, "While remaining above the company's historical 17-19% range, we believe this stability is critical in order to work through excess inventory and the lower-margin reselling of cancelled homes." It also stated, "Overall, we still believe industry order trends and can rates are stabilizing and improving on a sequential basis."

Margaret Whelan, the senior analyst at UBS Investment Research, noted that pricing was off only 6%, stating, "The decline in unit orders exceeded our -15% estimate, driven by the disappointing sales pace experienced during the spring selling season to date. That said, we favorably view the fact that pricing was flat seq as it demonstrates management's focus on protecting profitability."

The building research team at Credit Suisse on April 9 downgraded D.R. Horton to "underperform" from "neutral," citing the company's exposure to future land impairments. Horton, to date, has impaired less land percentage-wise than the industry in general, but it had been one of the more aggressive acquirers of land before the housing downturn began last year.