The new-home building market was bad enough during 4Q2008 for Pulte Homes executives to abandon the oft-used understatement of "challenging" during its fourth quarter conference call Thursday morning, Feb. 5.

"Incredible calamity" is how CEO Richard Dugas said the Bloomfield Hills, Mich.-based builder characterized the market during those three months.

"Generally speaking, it was just plain bad everywhere," said Steven Petruska, Pulte's chief operating officer.

While the company was able to significantly narrow its losses to $338.2 million or $1.33 a share from the same quarter of 2007, revenues from closings dropped 45% to $1.5 billion on 5,475 homes, 37% fewer than in 2007.

But the real nosedive was seen in new home orders, which were off 61% to 1,763 homes. With such a drastic reduction, Petruska said additional cutbacks are in the company's future.

As sales have dropped off, the number of spec homes--most generated by buyers walking away from deals rather than by design--simultaneously climbed higher than the company had hoped.

Petruska said spec inventory was 3,500 units, with 1,900 finished--"way more than we are comfortable with." Most were created by the 47% cancellation spike, up from 37% a year ago. The company's Del Webb active adult brand had a slightly smaller cancellation rate at 43%.

"Candidly, almost all the to-be-built are cancelling, and they end up specs," Dugas said. Ideally, one-third of the company's business is from spec sales while the rest are pre-sold, but that ratio has been jolted seriously out of whack by the cancellations.

Consequently, Pulte's margins suffered as it was forced to lower prices at the closing table when appraisers came back with values less than the sales price. Rather than lose the sales and create even more spec inventory to be sold, Pulte has been lowering its sales prices.

In markets such as Las Vegas where there are many foreclosed houses that are selling for discounts of 60% to 70%, Pulte can no longer discount them as aberrations in the appraisal process because they have become so common.

"That is becoming a market reality in those markets," said Petruska. "If we thought the market would get better in the next 30 days, we would probably stand our ground [on price]. ... We have probably been much more flexible at the closing table than we want to be."

On the positive side, executives said they saw increased traffic in January, a signal that the spring selling season is starting. They had no numbers on increasing traffic, so it is difficult to say whether they were significant or only noticeable because the previous quarter's numbers were so abysmal.

Still, it was taken as a good sign that there would be some sort of spring selling season.

"Buyers are still shopping and haven't been completely disheartened," said Dugas.

Other good news played up by executives was Pulte's ability to squirrel away nearly $1.7 billion in cash by yearend, about $500 million of which it generated in 4Q2008. Despite slow sales, Dugas said the company expects to be able to generate even more cash in 2009--and not just due to an anticipated a tax refund.

The money will come from not spending as much on land and community development as well as additional cuts to overhead and construction costs.

Dugas said the company will "work both levers to bring in cash."

However, Pulte isn't pulling out of markets, said Dugas. Instead, by maintaining a presence in markets the company thinks have long-term potential even as others abandon their positions, Pulte plans to increase market share.

"Timing and endurance," said Dugas. "Pulte is built for the long term."