by Calculated Risk on 3/27/2007 02:11:00 PM

From Reuters: Lennar says worst may not yet be over for inventory

Here is a real Time transcript of Lennar CEO Stuart Miller's comments (hat tip Brian):

“Let me begin by saying that these are difficult times for the home-building industry. We have recently completed our quarterly operation reviews with our division management team, and based on these extensive business plan and execution reviews, I can say first hand and with certainty that market conditions are very difficult across the country. As I listen to many of the leaders in the industry speak, that is our competitors and as I listen to economists and analyst and is investors, the message is becoming very unified and that is although we see some sporadic indications of firming in some markets, and we all look forward to seeing a firm foundation from which we can build forward, the reality is that market conditions are still challenging at best and in some markets continuing to deteriorate. Homes available for purchase has continued to climb while demand has been surely reduced. The market once driven by speculative build-up in demand and purchases that over the past years spurred more recent build up in inventory supply from speculators then put increased supply as they put homes back on the market and created the supply over hang and overall climate of customer caution.

On the demand side, the investor/purchaser part of demand has all but evaoprated. Primary purchasers on are on the side lines or demanding better pricing before purchasing. Because of the rapid deterioration of subprime lending market, an additional component of demand has now been sidelined because of the inability of a customer to qualify for a mortgage or because the purchaser of a customer's home needed for closing cannot qualify. What is clear is supply and demand have shifted and had are continuing to shift in some markets more rapidly than expected, and the inventory over hang will have to be absorbed before conditions normalize.

This is not new information. There remains a sizable amount of work to be done before our market finds any equilibrium. We have not seen evidence that the much anticipated winter/spring selling season has yet taken. Home pricing is continuing the process of being recalibrated in many markets through the use of incentives, brokers commission and price reduction, and the industry is continuing to be challenged to adjust home prices and land values as well. This recalibration process has not yet stabilized.

Further more, it is unclear today whether there is another shoe to drop. Questions remain as to whether our economy will weaken and the housing led recession or perhaps it is the supply and inventory over hang will be exacerbated by the resetting of mortgage rates on many adjustable rate mortgages that have fueled the market over the past years. Rate adjustments are creating payment stress concurrent with home prices falling and equity evaporating. On the other hand, the liquidity that exists in today's financial market is a real wild card and could be a critical mitigating factor alleviating negative market forces and restoring balance.

Lennar's strategy has been certain and consistent as we have seen these market conditions unfold over the past year. We have consistently focused primarily on protecting our balance sheet first and foremost. We have maintained day by day focus on our business operations. We have continued to refine our business model in each of our markets. We've mapped out a strategy to regain our margin in this new market environment, and we are determined to be possible positioned for recovered market conditions. Our overriding strategy is defined by our focus on our balance sheet. Our company has intensified the focus on generating strong cash flow at the expense of maintaining margins.”