There appear to be limits as to how far Lennar Corp. will slash prices to move homes during the downturn, and--in some markets--it's apparently reached them.

After reporting its $513.9 million third quarter loss Sept. 25, Lennar CEO Stuart Miller told analysts that Lennar, the first big builder to aggressively slash sales prices to move houses despite the downturn, has stopped short of competing with price cuts its competitors have been offering in their recent sales events.

"We continue to price to market conditions, but as we went through the third quarter we saw so many competing [cost cutting] programs to dramatically reduce inventory that it kind of got to the point where pricing was unrealistic and even ridiculous," Miller said. "I think you have to be sensible as you work through market conditions like this. What we don't want to do is jump into the toughest competitive environments and sell things at below a reasonable price point."

There are consequences to such pricing wars, Miller notes. Lennar wants to "make sure that we don't spiral that pricing downward to very, very, very low levels."

Miller told analysts that the company has not changed its strategy to sell homes at market prices but that, with its low debt levels, it isn't desperate enough to sell below market value as others have. Being able to make that decision is why the company focuses on its balance-sheet-first strategy, he said.

"While we continue to believe that the best way to generate cash flow is to deliver our inventory--by reducing prices to market pricing--we have stopped short of fire-selling our homes," Miller said.

There was little positive to report about the company's third quarter results, which went through Aug. 31.

Miller reiterated his statement from the end of the second quarter that three things have to happen before the market will stabilize and then begin to recover: Inventories of new and existing homes must stabilize and be absorbed, the mortgage markets must settle, and consumer confidence must be restored.

"In fact, we have not only not seen evidence of these items resolving, but instead we have seen further deterioration through the third quarter," Miller said.

To reflect the deteriorating conditions, Lennar went on a land impairment and write-off spree. The land-heavy company reported making $847.5 million in home building valuation adjustments and write-offs that not only cancelled out its gross home building profits for the quarter but also led to a $787.7 million gross loss.

Last quarter, Lennar wrote off deposits and pre-acquisition costs on 15,000 home sites it no longer plans to buy. That adds up to a total of 24,000 home sites the company has abandoned in the nine months that ended Aug. 31.

Lennar also reported mothballing a number of communities that wouldn't be profitable to develop in today's markets, but did not provide details about what communities are now in stasis.

"We look at costs to develop a parcel of land and actually develop home sites and include in that the cost of building a home, and you get to the point where the residual value of the land itself--even in well-located areas--is close to zero," Miller said.

While, Lennar's 2007 numbers so far are obviously bad, the backlog numbers make it clear they will be worse for the rest of this year through the first quarter of next at the very least.

It won't be building enough homes in the next six months to justify even the currently reduced head count. New-home orders are down 48% to 5,804, and the dollar value of those orders is off 60%, reflecting the lower sales prices and discounting the company has done to move homes. Then there's the unknown factor--what the cancellation rates will look like in the next few quarters. It was 32% in the quarter ending Aug. 31.

With revenue falling so quickly, it's difficult to cut expenses fast enough to match it. Lennar reduced its SG&A expenses by 35% in the third quarter, but the company made clear that additional reductions in staff as well as other expenses are necessary.

The numbers also illustrate the effect of Lennar's earlier strategy to move inventory at what seemed like any cost. Gross margins on home sales were 14% in the third quarter compared to 19.5% in the same quarter last year. The average house price fell from $316,000 third quarter '06 to $296,000 in third quarter '07. Incentives climbed from $35,900 a house to $46,000.

Lennar did something different in reporting its gross margins, showing what the home building margins are if you subtract land impairments. When $303.1 million in impairment charges are taken out of Lennar's $304.1 million gross third quarter home building margins, the company had only $1 million in gross home sales in its third quarter.

Lennar included those comparisons, which aren't required by accounting rules, "because the company finds it useful in evaluating its performance and believes that it helps readers of the company's financial statements compare its operations with those of its competitors," Miller said.

Lennar held its debt-to-capital level at 33.5% as a bright spot, but that was pretty much all it had to offer other than a pep talk from Miller.

"Let me say, in the current market condition, it feels like the market will never recover," said Miller. "It will, and we are working toward that day. The third quarter was disappointing. We will reposition our company to emerge from these times scaled down and prepared to reclaim profitability another day."