普爾特房屋 (PHM) 2008 Q2 法說會逐字稿

Food day ladies and gentlemen, and welcome to the second quarter, 2008 Pulte Homes earnings conference call.

My name is Carissa, and I will your coordinator for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr.

Calvin Boyd.

Please proceed.

Thank you, Carissa.

Good morning, and thank you for joining us to discuss Pulte Homes financial results for the three, and six months ended June 30, 2008.

I am Calvin Boyd, Vice President of Investor and Corporate Communications.

You have all had a chance to review the press release we issued last night, detailing Pulte's second quarter 2008 operating and financial performance.

On the call to discuss these results are Richard Dugas, President and Chief Executive Officer; Steve Petruska, Executive Vice President and Chief Operating Officer; Roger Cregg, Executive Vice president and CFO; and Vinny Frees, Vice President and Controller.

For those of you who have access to the internet, a slide presentation available at www.pulte.com will accompany this discussion.

The presentation will be archived on this site for the next 30 days for those who want to review it at a later time.

As with prior conference calls, I want to alert everyone listening on the call and via the internet that certain statements and comments made during the course of this call must be considered forward-looking statements as defined by the Securities Litigation Reform Act of 1995.

Pulte Homes believes such statements are based on reasonable assumptions but there are no assurance that actual outcomes will not be materially different from those discussed today.

All forward-looking statements are based on information available to the company on the date of this call, and the company does not undertake any obligation to publicly update or revise any forward-looking statements as a result of new information in the future.

Participants on today's call should refer to Pulte's annual report on Form 10-K for the year-ended December 31, 2007, for a detailed list of the risks and uncertainties associated with the business.

As always, at the end of our prepared comments we will have time for Q&A.

We will wait until then before opening the queue for questions.

I will now turn over the call to Richard Dugas, for his opening comments.

Richard?

Thank you, Calvin, and good morning, everyone.

The housing industry remain hampered by deflated buyer demand and lower consumer confidence in the second quarter of 2008.

The combination of low absorptions and pricing pressures contributed to ongoing elevated levels of new and existing unsold home inventory, that may take quite some time to clear.

The operating environment is difficult and the challenges continue to mount.

Despite these difficulties, Pulte continues to make meaningful progress against its near-term strategy, which centers around generating cash, adjusting its overheads, and managing it's inventory levels.

Let me take a moment to highlight our second quarter accomplishments.

First, we generated significant positive cash flow during the quarter.

This is particularly noteworthy because we normally consume cash in each of the first two quarters of the calendar year.

Second, we reduced out overhead costs dramatically from prior year levels.

Our ongoing efforts to align our cost structure with the low level of demand for homes resulted in a decrease of $118 million versus last year's second quarter.

We are also very pleased to report a small pre-tax profit from operations prior to consideration of impairments and land-related charges.

This accomplishment is the result of an unyielding focus on selling and closing homes, combined with a sharp eye on expenses.

My hat is off to all of our employees for a job well done.

As we see no immediate signs of this housing down turn relenting, we believe these accomplishments underscore our focus on the short-term elements of our plan and these will continue to guide our efforts in the coming months and quarters.

From the operations perspective, the overall sales environment continues to be challenging for both new and existing homes.

The rate of decline in new home pricing has begun to slow in some markets, but recent results from the Kay Schiller Study show that pricing for existing homes has fallen more than 15% from year ago levels.

We feel that this trend in existing home pricing will likely continue and is a necessary move.

New-home pricing had seen larger declines earlier in the downturn so it's encouraging that existing home prices have begun to adjust accordingly.

On a unit basis, we are very pleased with our sales and closing performance in the midst of this downturn.

Pulte remains committed to selling and closing homes and sees this as the only sustainable and reliable way to generate cash flow.

We much prefer to harvest cash by selling and closing homes, versus unpredictable one-time events like bulk land sales.

Our operating and cash numbers indicate that our strategy is working.

Managing house and land inventory also remain integral parts of our operating plan.

We continue to reduce speck inventory levels and also drive down the number of lots under our control.

We consider these substantial accomplishments in an ongoing weak environment.

Continuing to drive down inventory levels from selling and then closing our homes, remains one of our primary goals.

On the Congressional front ,the housing and particularly the tax credit component of the stimulus package, is being finalized and appears headed for law any day now.

Pulte has been very active in these discussions and believes any incentive for potential home buyers to purchase new and existing home inventory, will help us reach a level of stabilization earlier.

Looking forward, I strongly believe that Pulte will emerge at the head of a small group of builders that not only navigate through this down turn but also position themselves to capitalize on the turn around.

A big part of our confidence comes from our transparent well-positioned balance sheet.

In our press release issued last night we reaffirmed our year-end cash goal, which now stands at $1.7 billion to $1.9 billion of cash by the end of 2008.

The cash goal was adjusted by the $313 million debt reduction mentioned in the release.

We also have a very favorable debt structure with virtually no debt maturities until 2011.

Very few of our large competitors have a similar debt structure, which we count as a big advantage, one that was established years ago.

Overall we realize the market conditions that exist today are extremely difficult and we do not expect them to materially improve in the near term.

That is why in the midst of this downturn it's important to maintain a long-term view of the industry.

A recent report issued by Harvard's Joint Center for Housing Studies, reflects that household growth will average approximately 1.3 to 1.4 million persons per year for the next decade.

Other demographic trends including immigration and overall population growth, will eventually contribute to a stronger demand for new homes in the future.

With a proper balance of short-term goal execution and a necessary long-term view of the industry, Pulte labels its position as, quote, "waiting to capitalize," i.e., positioning ourselves to take advantage of opportunities when signs of stabilization become visible.

Lastly, let me once again recognize our people here at Pulte who continue to perform well in the midst of the worse housing environment in recent memory.

Our entire senior management team is thankful for your focus, commitment and dedication.

It's this level of performance that drives our confidence in the long-term success of this company.

Thank you and now let me turn the call over to Roger Cregg.

Roger?

Thank you Richard and good morning.

Our second quarter home building net new unit order rate decreased approximately 32% from the second quarter last year on approximately 16% less communities versus the same quarter last year, and down approximately 7% in communities from year end of 2007.

Revenues from home settlements for the home-building operations decreased approximately 18% from the prior-year quarter to approximately $1.6 billion.

Lower revenues reflected lower unit closings that were below prior year, by approximately 8%.

The average sales price decreased approximately 11% versus the prior-year quarter to an average of $286,000 per home.

The second quarter land sales generated approximately $25 million in total revenues, which is a decrease of approximately $66 million versus the previous-year's quarter.

Home-building gross profits from home settlements, including home-building interest expense for the quarter, increased to a profit of approximately $18 million versus a loss of $353 million in the prior-year quarter.

Second quarter home building gross margins from home settlements as a percentage of revenues, was 1.1% compared with a negative 18.6% in the second quarter of 2007.

The increased margin conversion versus the prior-year quarter is attributed to lower community valuation adjustments in the current quarter offset by reduced closing volumes and increased selling incentives.

Adjusting the current quarter for land and community valuation charges of approximately $154 million, and a favorable house warranty reserve adjustment of $7 million, the gross margins from home settlements as a percentage of revenues, was at a run rate of approximately 10.6% for the quarter.

The current quarter benefited from the impact of prior quarters, land and community valuation adjustments by approximately 717 basis points, or approximately $111 million.

Home-building interest expense decreased during the quarter to approximately $39 million, versus approximately $96 million in the prior year.

Included in the interest expense of $39 million is an additional $12 million of expense related to land and community valuation adjustments taken in the current quarter.

Also included in the gross margin for the quarter was a charge related to land and community valuation adjustments in the amount of approximately $141 million.

For the second quarter we tested approximately 79 communities for potential impairments and valuation adjustments.

We recorded valuation adjustments on approximately 48 communities for the quarter of which approximately 31 communities, or 65%, had been previously impaired.

Of the $141 million of land and community valuation adjustments, approximately 43%, or $60 million, were related to Del Webb communities.

The total gross loss from land sales posted for the quarter was approximately $43 million.

The loss is mainly attributed to the fair market value adjustment in the current quarter for land being held for disposition in the amount of approximately $45 million which is included in the land cost of sales.

The gross profit contribution from specific land sales transactions were approximately $2 million for the current quarter.

Land sales transactions during the quarter included single-family custom lots, several larger residential parcels representing approximately 900 lots, along with some smaller commercial land parcels.

Recapping the components of the $220 million in impairments and land-related charges for the second quarter, we've included a slide in the webcast breaking out the charges by categories and reporting segment.

SG&A expenses, as a percent of home sales for the quarter, was approximately 11.4% or $178 million.

A decrease of approximately $118 million or approximately 40% versus the prior year quarter.

The current quarter reflected the reduced level of expenditures in all categories associated with the decline in volume and also included approximately $2 million in severance related to overhead reductions made during the quarter.

The prior year quarter, included a restructuring charge associated with overhead reduction initiatives, approximately $31 million, and also included an insurance reserve related charge of approximately $29 million.

In the other income and expense category for the quarter, the expense of approximately $19 million included approximately $4 million in customer deposit forfeitures, offset by approximately $22 million associated with land deposits and pre-acquisition costs and valuation adjustments related to certain investments and unconsolidated joint ventures.

The home building pre-tax loss for the second quarter of approximately $221 million resulted in a pre-tax margin of approximately a negative 14% on total home-building revenues.

Excluding the charges related to the valuation adjustments and land inventory in investments, land held for sale and severance and related charges, home building pre-tax margins converted at approximately a break even, or a pre-tax gain from operation, of approximately $1 million for the current quarter.

The second quarter home-building operations backlog was 8,254 homes valued at approximately $2.4 billion.

The pre-tax income from Pulte's Financial Services operation for the second quarter was approximately $11 million, or an increase compared with the previous year's quarter, of approximately $4 million.

We continue to experience a favorable product mix shift in the second quarter as funded agency originations were approximately 99% of loans funded from the warehouse line, versus 79% for the same period last year.

Non-agency funded originations fell from 21% of loans funded from the warehouse line last year to approximately 1% this quarter.

Additionally, within the funded agency originations, FHA loans continue to increase as they were approximately 24% of the loans funded from the warehouse line in the second quarter versus approximately 13% in the first quarter of 2008.

The level of adjustable rate mortgage products originated during the second quarter of 2008, decreased from approximately 10% of origination dollars funded from the warehouse line in the second quarter of the previous year to approximately 4% this quarter.

Pulte mortgages capture rate for the current quarter was approximately 92%.

Mortgage origination dollars decreased in the quarter approximately $299 million, or 25%, when compared to the same period last year.

The decrease is related to the volume decrease in the home-builder closing activity for the quarter.

The average FICO score of our loans closed for the period was 736, versus a score of 741 for the first quarter of 2008, and down slightly from 746 for the same period last year.

In the other non-operating category, pre-tax loss for the second quarter of approximately $5 million, includes mainly corporate expenses of approximately $10 million, offset by $6 million in net interest income related to our cash balance in the quarter.

For the second quarter the company's pre-tax loss was approximately $215 million, and excluding the charges related to the valuation adjustments in land inventory and investments, land held for sale and severance and related charges, represented a pre-tax gain from operations of approximately $8 million from the company in the current quarter.

The company's income tax benefit for the quarter was approximately $57 million compared with a benefit of $299 million in the prior year period.

This amount represents an effective income tax rate for the second quarter of 26% compared with an effective tax rate of 37% in the prior-year quarter.

The second quarter of 2008 benefited primarily, included an adjustment in the deferred income tax assets, increasing from 106 million to 170 million.

This is to reflect the current estimate of the amount realizable from the carry-back of the current years net operating loss to the 2006 tax year.

The net loss for the second quarter was approximately $158 million, or a loss of $0.63 per share, as compared to a net loss of approximately 508 million or $2.01 per share for the same period last year.

The number of shares used in the EPS calculation was approximately 253.5 million shares for the quarter.

Looking at the balance sheet for the second quarter, we ended with a cash balance of just under $1 billion, decreasing approximately $83 million from the first quarter of this year.

House and land inventory ended the quarter at approximately $5.7 billion.

Excluding the inventory adjustments for the second quarter, total inventory decreased approximately $300 million from the first quarter.

House inventory excluding land for the quarter decreased approximately $36 million, related to ending with fewer homes under construction in the second quarter versus the first quarter.

Land inventory during the second quarter, excluding valuation adjustments, decreased approximately $250 million.

The major changers were from land relief through home settlements of approximately $400 million, offset by investments in rolling lot option takedowns of approximately $12 million, and land development spending of approximately $175 million for the quarter.

For the second quarter we had net deferred tax assets of approximately $1.77 billion.

Offset by a valuation allowance $908 million.

In accordance with statement of financial accounting standards 109, as I mentioned previously in the second quarter, deferred tax assets were adjusted from $106 million to $170 million, to reflect the current estimate of the amount realizable from the carry-back of the current year's net operating loss to the 2006 tax year.

Highlighting the major components of cash flow for the second quarter, total inventory decreased, contributing approximately $280 million through the reduction of both house and land inventory.

We completed the tender of our 2009 senior notes during the quarter, paying off approximately $313 million.

In addition, in the second quarter, we increased our equity contribution to pay down approximately $27 million in associated debt in one of our unconsolidated joint ventures.

With approximately $1 billion in cash to end the second quarter, we had no outstanding balance drawn on our revolving credit facility at the end of the quarter.

The company's gross debt to total capitalization ratio was approximately 47.7%, and on a net basis 38.6% at June 30.

Interest incurred amounted to approximately $57 million in the second quarter, compared to $62 million for the same period last year.

Pulte Homes shareholder equity for the second quarter, was approximately $3.5 billion.

We repurchased no shares during the quarter, and the company has approximately $102 million remaining on the current authorization.

On our unsecured revolving credit facility financial covenants for the second quarter, the required debt to total capitalization ratio was not to exceed 50%, and at June 30 the ratio as defined in the credit agreement was 44.9% and the tangible net worth cushion as defined in the credit facility, was approximately $251 million.

Now, looking forward to the third quarter of 2008 and under the SEC Regulation FD guidelines, we're providing the following guidance on our current expectations and projections for the quarter.

Third quarter earnings per share estimated to be a loss to break even in the range from approximately a net loss of $0.15 per share to a break even for the period.

The following guidance is targeting the midpoint of the range.

This range does not include a tax benefit or the potential for additional land valuation adjustments, option deposits and other related charges.

Although we may incur write-offs, it is uncertain at this time as to the estimate of these amounts.

This earnings per share number is calculated based on approximately 253 million shares.

Unit settlements in the third quarter of 2008 are projected to be in the range of approximately 5100 to 5400 deliveries.

Average selling prices for closings in the third quarter are estimated to be approximately $286,000 per home.

Gross margin performance for home settlements as a percentage of sales for the third quarter is estimated to be in the approximate range of 9.8% to 9.9%.

The projected gross margin for the quarter primarily reflect community pricing strategies and generating sales momentum and pricing incentives experienced over the period in response to local market conditions.

In addition, this gross margin range includes an estimated 52 basis point improvement in the recovery of additional inventory valuation adjustments taken in the second quarter of 2008.

We are currently projecting no land sale gain for the third quarter.

As a percentage of sales, SG&A is expected to be in the range of approximately 11% to 12% for the quarter.

In the home building other income and expense category for the third quarter, we are projecting an expense of approximately $5 to $6 million.

Pre-tax income in our Financial Services operation is expected to be approximately $3 to $4 million for the third quarter.

Total other non-operating income is projected to be $2 to $3 million for the third quarter, with other non-operating expenses partially offset by increased net interest income.

For the third quarter, tax rate, we continue to take a conservative approach in our guidance and are projecting no tax benefit due to the uncertainties associated with additional tax benefit realizations.

Given the challenging market environment, we are offering no full-year outlook for 2008 at this time.

We will continue to assess conditions through the next quarter and provide any update accordingly on our third quarter conference call.

With a combined, continued focus on cash management and house and land inventory we are targeting ending the year of 2008 with an ending cash balance of approximately $1.7 to $1.9 billion, reflecting the $313 million senior note tendered and repurchase completed during the second quarter.

Additionally with this level of cash on hand throughout the year, we anticipate no outstanding balance on our revolving credit facility at year end.

I will now turn the call over to Steve Petruska for more specific comments on second quarter operations.

Steve?

Thanks, Roger, and good morning, everyone.

High inventory levels for new and existing homes, tighter mortgage liquidity and a weak consumer demand continues to be the calling card for this industry downturn.

Many of our potential buyers are having difficulty selling their existing homes, this continues to hamper new home sales in our all of our markets across the country.

Although these challenges continue, we have held firm in the pursuit of our near term strategy and we believe we're holding our own.

Cash generation, maintaining a lower cost structure and managing inventory levels continue to be our focus.

First, we've worked hard in each of our markets to sell homes and generate cash in each community.

That may seem like an obvious goal but in this challenging environment builders are generating sales with varying levels of success.

Second, Roger has already discussed our overhead savings, which helps us maintain a structure more appropriate for the challenged sales environment that exist today.

In addition, we feel that builders with more volume get better pricing from their suppliers and contractors, Pulte is leveraging this benefit wherever possible to realize these savings.

We are gaining market share in most of our markets and that is also helping to drive down costs even in the face of ever rising commodity prices.

Third, we are striving to keep land acquisition and development spending low, and reduce the supply of lots under control through sales and closings.

Pulte controlled approximately 135,000 lots at the end of the second quarter 2008, down 8% sequentially from the first quarter, and 29% lower than the second quarter of last year.

Of these total lots, 115,000 are owned, and 20,000 are controlled with options.

We will maintain our focus on reducing land inventory, limiting future land investment to current projects and takedowns on finished lots where absorption paces in margins are acceptable.

Or field operators have been doing a wonderful job of maintaining the proper balance between making investments needed to drive further sales, while making sure that all of their communities are cash-flow positive.

Additionally, we continue to make progress in managing our speculative home inventory.

We ended the quarter with 3100 speck units, down 8% sequentially from the first quarter of 2008, and 16% lower than last year's second quarter.

We have 979 finished spec homes which is down slightly versus the first quarter of this year, and represents less than two finished homes per community.

As buyers are not making purchases until they have sold their own homes, we are finding the need to carry a limited amount of completed inventory to maintain sales paces.

I speak regularly with all of our area Presidents to ensure we preserve the proper inventory balance with an eye on always reducing what inventory we have.

We experienced further downward pressure on home prices throughout the second quarter of 2008.

However, it's important to note the pace of price reductions slowed somewhat during the quarter.

Our field operators continue to challenge their teams to maintain prices in communities and markets where demand is stronger, yet remain responsive to this very dynamic pricing environment.

Settlement revenues for the second quarter of 2008, declined 18% from the second quarter 2007 levels, as home closings decreased a relatively modest 8% for the same period.

Average sales price was also down approximately 11%.

Second quarter 2008 sign-ups totaled approximately $1.4 billion as our average sales price for sign-ups were 15% lower from the same period a year ago, and unit volumes decreased approximately 32% year-over-year.

Net new order dollars represent a compositive new order dollars, combined with other movements of dollars and backlog related to cancellations and change orders.

Our cancellation rate was 29% for the second quarter, essentially flat as compared with both the first quarter and the prior-year second quarter.

A cancellation rate of 25% for our Del Webb brand reflects its out-performance versus our traditional Pulte product.

A stable cancellation rate is only one of the changes needed to signal stabilization in this turbulent housing market.

I will now provide a few comments about our operations by region.

Sign-ups for our Northeast operation were down 38% year-over-year.

A high level of unsold homes continue to be the main problem in our Washington, D.C.

and Maryland operations, along with the weakening demand environment.

On a modest -- modestly positive note, although sales were lower, our market share in the Delaware valley has risen, making us a top builder in that market.

The Southeast, which includes the Carolinas, Georgia, and Tennessee, saw their sign-ups decline 27% compared with last year's second quarter.

Our South Carolina costal and Georgia markets performed better than average with sign-ups 10% and 16% lower year-over-year respectively.

Our Charlotte market, with a 24% decline in sales versus last year, has become a tale of two brands.

Our Del Webb product is performing well, while our traditional Pulte communities continue to struggle as the Charlotte economy deals with the ever-expanding banking downturn.

Our Sign-ups were down 19% in our Florida operations versus the second quarter of 2007.

The housing environment is still not great in this area as high levels of unsold new and existing home inventories continue to put pressure on sales.

We are repositioning our product to smaller more affordable plans.

We were relatively pleased with only a 3% decline in sign-ups in Southwest Florida operations compared with last year.

Florida is another area where market share gains are noticeable.

We have become the top builder in Orlando, with an 8% market share, and we now have a 13% share in Tampa.

Our Midwest operations experienced a 38% decline in sign-ups year-over-year.

Our Illinois market was down 44% as potential buyers of our Del Webb product find it challenging to sell their existing home.

Although sales in our Minneapolis market are down 38% year-over-year, resell inventory has begun to decline, hopefully an early sign of something positive for this market.

The operations in Michigan and Indianapolis also showed year-over-year declines in sign-ups.

Our central region, which includes all of our Texas markets, saw sign-ups decline 44% year-over-year.

Houston showed the largest decline with sign-ups down 56% year-over-year.

Our Dallas and Austin markets were down 41% and 42% year-over-year respectively.

Although homes in Texas did not experience as much price depreciation as did other parts of the country, many potential buyers are hesitant to enter the new home market due to concerns about price declines.

Also, mortgage availability continues to be a challenge for some of these buyers.

However, economic indicators across the state continue to show positive trends in job growth and household formations.

Our -- our Southwest segment, which includes New Mexico, Las Vegas, and Arizona, showed a 27% decrease in Sign-ups from the second quarter of 2007.

This performance was modestly better than the first quarter of 2008, as we leveraged our finished lots to drive volume in these markets during the quarter.

Also we responded to increased incentives offered by competitors by lowering prices in some of our communities.

This was the case in our Las Vegas operation where we experienced a 25% year-over-year decline, versus a 56% year-over-year decline in the first quarter.

Sales in our Phoenix operation were 29% lower versus last year, where high levels of resell inventory continue to negatively impact new-home sales.

However, the larger story here is market share gain.

Our market share increased materially in Las Vegas, Phoenix, and Tucson, primarily due to a decline in the number of competitors.

We maintain a number 1 market share position in each of these markets.

Additionally our market share in New Mexico is 13%, up from 8% last year.

Sign-ups declined 41% year-over-year in our California operations.

Our Northern California markets, including our Bay Area, Sacramento and Central Valley operations were down a relatively modest 27% from the period -- from the period year quarter -- prior-year quarter.

Our Central Valley operations is now number 1 in that market.

Our attached product in the Bay Area has performed well.

Sign-ups in Southern California area fared a bit worse, with sign-ups 57% lower than last year.

Our coastal market was hardest hit as it saw a 77% year-over-year decline.

This is primarily due to a 40% decrease in community count for our Southern California operations along with an excess supply of unsold new and existing home inventory, rising foreclosures and fierce competition among builders.

As this difficult operating environment persists, adherence to a resolute strategy is paramount.

Pulte will continue to concentrate on selling and closing homes, generating cash and delighting its customers.

We will also remain focused on keeping land acquisition and development spending low, managing speck inventory levels, and achieving the best possible balance of price and pace in each of our communities.

Finally, we will keep driving down overhead costs until we see signs of an industry stabilization.

We are confident that this unwavering approach will help position Pulte for long-term success.

One final note, I want to add another thank you to Richard's earlier comments about our outstanding Pulte employees.

You continue to display an outstanding attitude and you bring your best to the job day in and day out.

This dedication is a testament to the quality of individuals each of you are, and you are truly making the difference in this difficult time.

Everyone knows that this difficult environment is not getting any better, but because of you, we are getting better.

Now let me turn the call back over to Calvin.

Thank you Steve.

I want to thank everyone for your time and attention on the call this morning.

We're now prepared to answer your questions.

So, that everyone gets a chance, participants will be limited to one question and a follow-up, after which they will have to get back into the queue.

At this time we'll open up the call to questions.

Carissa?

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Dan Oppenheim of Credit Suisse.

Please proceed.

Thanks very much.

Just wondering if you can talk about the -- where you were saying was reducing speck inventory versus the goals for market share.

If you look throughout the region or (inaudible) some of the markets, are you seeing any places where you are looking at saying, "probably should have had more speck homes to increase sales here potentially in the Northeast?" How are you looking at that, I guess in light of the 16% community count decline relative to the decline in new orders?

Are there some areas where you think you effectively need to have more specks out there to generate sales?

Dan, this is Richard, I'll start and then ask Steve for some more specifics.

Generally speaking we're not looking to put additional speck out there.

As Steve indicated we're finding some modest level of speck is necessary because of this concern that people are not shopping until they sell their existing home.

Having said that, we think the risk still outweighs the benefit of putting excess speck.

So, we're trying to balance it candidly, and you saw our numbers -- excuse me -- particularly for finished specks, come down slightly.

And our overall level of speck come down slightly.

I suspect that trend will moderate somewhat.

I don't think it's likely we're going to -- you know, drop specks 30%, 40% any time soon just because of the environment and the cancellations that continue to go on.

The market share that you talked about is a function of having communities still open, whereas many builders have, you know, either gone under or pulled out of markets, so we believe one of the signs of recovery -- or one of the benefits of any recovery is going to be first in same-store sales growth, whereas bringing new communities on is going to take some time.

So, we're seeing that play out, but our overall goals with specks are not changed.

And Steve, you might add some color there.

Yes, Dan, I think Richard hit it best, when we said we have the right balance right now.

I don't think there's anyplace where we feel like we would have sold more homes had we had more homes available.

And so, certainly we're not feeling like we need to put any more speck inventory out there then what we currently have.

And remember we still have a 29% cancellation rate, which is historically high for us.

So, that affords us some opportunity to have a bit more inventory available for those buyers that need it.

Secondarily, the market-share numbers, although we're pleased to see our market share grow, they're more a byproduct of the current environment that we're in.

Exactly like Richard said, with the decrease in competition, we're seeing that our staying power and our ability to continue to sell in those markets is just driving some out-sized market share gains.

Great and then just a follow-up.

When you are talking about impairments you said you tested 79 communities for impairment during the quarter, that's probably somewhere in the neighborhood of 15% of the communities.

Can you give us a sense in terms of just what metric you are look at just to see in terms of if you should be testing them and just how far off some of the others were in terms of just what could happen in future quarters with the further price decline?.

Yes, this is Roger, we've been into these impairments now for three years.

So, the test has really not changed.

It's based on, quite frankly, the pace of the community, it is based on the price, which relates to the margin and the profitability of the community and the cash flows of the community.

So, all of those are tested and certainly when we look at from a quarter-to-quarter basis, as pricing may adjust or pace may adjust, we take all of those factors into consideration, and we take a look at those and run the cash flows based on those.

So, there is always a wide range of assumptions that go in there based on the market conditions.

Not only necessarily what we're experiencing in a particular community, but also what's going on in the particular submarket itself -- what competition is doing.

So, all of these things we continue to weigh up, gave rise to reviewing, like I said, about 79 communities, and only lead to the impairment of -- you know, not all of those.

So, again, there are more projects that we look at, but again some don't rise to the level of, you know, a lot more detail because they're in the same place they may have been in the previous quarter or two quarters.

Okay, thanks very much.

Your next question comes from the line of Ivy Zelman of Zelman and Associates.

Please proceed.

Hi, good morning, guys, good quarter.

Thank you.

Just wanted to look at your total lots that you have owned and controlled, easy question I hope.

Can you just give us some idea about how much of that is finished versus undeveloped?

Ivy this is Roger.

We don't have that right in front of us.

I think, you know -- lets see, at one point we talked about roughly -- about 40,000 -- you know, at one point it was about 45,000, give or take, lots.

So, that's roughly finished, and, you know, as we looked around the system, out of the total amount, that's what we found.

Again, concentrations in different areas of the country.

But that's a rough guess.

We can get back to the specifics for this quarter, but that was roughly what we had at the beginning of the year.

Great.

Well on the same idea of land just, Richard, your comments, generally strategically, there's been a lot of discussion with investors focus on home building the difference between the asset light strategy and builders that don't have any land, are they in better position or very little finished inventory -- are they in better position than those that are long land?

And I think you've had a definite view on that and I think many people are curious, if you can elaborate on, why you think having land maybe be in a better position than having very little land.

Ivy, I think there's mainly two or three specific reasons.

First, is that builders that have land are going to be able to capitalize on the recovery first with market share growth through same-store sales.

Anybody who has to go out and get lots and titled and approved, whether they're finished or not, it's still going to take some amount of time, so we will see a recovery first.

Secondly, if you have the ability to take the existing land you have, and market to fair market value, in many cases, as I think we indicated last quarter, we've written projects down, in some cases to zero, and the ability to price new lots coming out is not going to be zero, obviously.

So, from a strategic component, we feel like it's much better to hold on to the land you have, versus going out to get it because you are going to pay more for it.

And I am speaking on the same -- same lot basis.

And that's obviously not in every single market that that exists, but quite a few.

And then, you know, I think the third reason is that because of the lengthy entitlement time that it takes for lots, I think there's a bit of misperception that finished lots are going to be available everywhere.

And many of the lots that builders have walked away from are not completely finished, they're in some stage of entitlement, and in many cases may have to go through either a full re-entitlement or at least a partial, so it's going to take some time.

So, our overall view is that land sales and getting rid of your land and going to an asset-light strategy is not what a builder would prefer to do if they had the choice.

Some that need cash and in, you know, more desperate situation than others may be may feel the need to do that.

But in our case since we're strong on cash, and a big reason for that is the finish lot inventory that we have able to harvest cash, we'd prefer to hold on to the land that took us a long time to get.

Now, the only exception to that would be in our view, if A) we had poor land positions, of which we have a few that were marked for sale; or B) if we had a significant need for cash and we don't see either of those occurring in the near term.

So, that's our view.

So, that's very helpful.

If I can sneak in one more as it relates to land again.

We're seeing a lot of bank portfolios that are being marketed or land -- non-performing loans being marketed for sale.

And wondering as the banks continue to recognize their problems in the C&D world what the impact would be on land values?

And do you think the banks are recognizing their problems?

Or is at it slow process and with more builder failures coming, is it a risk to the industry's underlying portfolio that will continue to come down in value as that market -- as that land changes hands back to the industry?

Ivy, Richard again.

And then I will turn it to Steve for some market commentary.

Both he and I have been traveling extensively this year.

And our view so far is that the banks have not gotten realistic enough with their pricing on some of the non-performing assets to make them attractive.

I am just beginning to hear of the very first very few anecdotal parcels that our people are finding, that "light pencil" in today's environment.

Although we're not yet ready to pull the trigger on many of those, because, you know, candidly we don't think they're as good as they are going to get yet from a valuation standpoint.

In terms of the whether or not that has risk to further valuation adjustments on land or what have you, I guess time is going to tell, and I suspect in some markets it might and in others it may not.

You know, having said that, I can tell you that every builder, and certainly Pulte included, is contacting all of the banks as well as the financial institutions, and is probably going to be one of the first places we can go, because I do know this, once the pricing gets good, the return implications of a very asset-like purchase in some of those communities, are going to be very good.

And, Steve, you might just add your view on that, too.

Yes, I will tell you, Ivy, first of all, that the banks are not realistic yet.

They're probably going through some of the same shock that the builders did a couple of years ago, as we came to grips with what was happening in the industry.

So, most of our discussions with portfolios that have become available either have too much risk for future development and/or entitlements in some the lots, or if they are finished lots, they are simply too high priced.

So, we haven't been able to even remotely look at anything there.

I do think that as they continue to make their rounds and try to figure out how they're going to move those assets, that we will see pricing that works in today's home pricing environment.

That said, I think that -- and we have had this discussion before, I think that any time you put more land in to the overall pile, it could have detrimental impacts on what the valuation is for a certain market, but like Richard just said, I do think it's going to vary from market to market, and we have to -- you know, wait and see what happens.

I still think that we can be opportunistic, when those opportunities come up, but right now they are not out there and it's really not on the radar screen, I don't think for the next six to nine months.

Great.

Thanks a lot, guys.

Your next question comes from the line of Michael Rehaut of JP Morgan.

Please proceed.

Hi, thanks, good morning, everyone.

Good morning, Mike.

Good morning, Mike.

First question, just on the sources of mortgage financing, you had mentioned that about 24% of the loans -- I guess -- closed this quarter were from FHA, can you give us a sense also of the amount of loans that you guys originated that had down-payment assistance, from -- non-profit down-payment assistance programs?

Yes, Mike this is Roger, of the total number of closings that we had in the quarter, roughly about 10% were down-payment assistance, and the first quarter was roughly about 6% for us.

Okay.

Great.

Second, just on the land spends, you know, it's been impressive about the fact that you've been able to maintain a pretty high level in terms of cash-build guidance so far and congrats on that.

And just trying to get a sense of what you expect in terms of land spend this year, and given that -- I think -- in your previous comments, you were talking about how a certain level of volume is desirable to keep your presence, to keep leverage with your suppliers, and other -- other benefits.

What you kind of think of in terms of a minimal land spend to keep your markets going on an annual basis?

Yes, Mike, this is Roger.

As you look at that, first I'll start with, you know, what we thought for the year.

We originally gave guidance and discussed putting into the business about $1.2 billion this year, of 2008, and that was roughly about $900 million in development and also about $300 million in rolling lot option takedowns.

We've not changed that view but of course you can imagine as we come through the year and the dynamics of the changes on a quarter-to-quarter basis, that we'll impact that as we go forward.

So, we're constantly trying to balance where we put our investment.

What lots we take down based on the given environment in submarkets.

So, to give you guidance on that today, we're no not updating that.

But again as you can imagine it ebbs and flows, as the closings and the markets and the sales go, you know, in those markets.

So, and what was that land spend last year, Roger?

Roughly we're at about -- I think roughly about $1.5 billion, maybe $1.7 billion, somewhere in that range, (inaudible) the specific number, I don't have it in front of me at the moment.

But -- so, you know, it was less this year than it was last year.

Now, overall if you say what is comfortable, again, we have to look at the markets, because all of our land is not in the markets that are doing the best today, not every project is doing the best in the right places.

So, you know, we have some overconcentration in some areas and under in others.

So, we'll be selective as we move forward, looking at opportunities to make sure that we have those markets, you know, funded from the standpoint of land acquisition.

Some of our markets, today, are beginning to run out of land lots, and so we continue to focus on the opportunity there to reinvest in that market, because we believe it's a good market and strategic to us overall.

So, we are don't want to lose that opportunity, as well as look at the ones that we can continue to move that, you know, as Richard mentioned earlier, projects that aren't performing as well to try to move those.

You know, absolute sustainability of the business, if you were to step back and look at how much we use in soft costs, and taxes and that type of thing, maintenance on top of projects that we have out there, homeowner's associations where we have responsibilities and stuff like that.

We've talked maybe about 25% of our -- our overall spend of the $900 million.

So, that would be something that, you know, we would say is almost a fixed cost in the business in order to maintain the level of land that -- that we have to go forward.

So somewhat of our obligation.

And -- and as you can see there is the opportunity to pull that back even more, you know, with only that level of the $900 million.

Right.

Right.

That's very helpful.

I appreciate that.

One last question if I could, just a clarification on what your comments before, Richard, on, you know, the banks, and I think Richard and also Steve kind of mentioned that -- banks not getting realistic enough on what they are asking for in terms of some of these properties or -- or loans that they have on their books.

Can you give us any further granularity in terms of, you know, geographically where those banks that are perhaps not as -- as realistic as -- as you would -- as you think is necessary?

You know, are they -- as you travel and interact, are -- you know, Vegas, Phoenix, California, Florida, any sense of, you know, perhaps where they're furtherest away from -- the -- the natural bid or the underlying value?

Mike, that's very difficult.

I was in the Northeast all last week, and I can tell you from everything -- I talked to our operators there and the banks are not realistic at all in that part of the country, but I would also point out the market is not as bad in that part of the country as it's been in Southwest or Florida or what have you.

So, very difficult to say, I guess the best thing to just continue to point out is that the bid (inaudible) spread is just too wide.

And frankly that combined with the fact that, you know, builders are not exactly out aggressively, you know, looking for land, I think builders are just beginning to, you know, consider that, and still lead to this basically stalemate in terms of no transactions that are happening, or very, very few selected transactions, so it's very hard to pinpoint.

Unfortunately it's very market specific.

And in the case of us, as an example, we have a strong supply of lots in Arizona, so, you know, we're not as aggressively looking in that market as we may be in a couple of other markets in the Southeast or in other selected places where we need lots in the relative near term.

So, I wish we could give you an answer on specifics, but it's a little too difficult.

Okay.

Appreciate it.

Thank you.

Thank you.

And your next question comes from the line of David Goldberg of UBS.

Please proceed.

Thanks, good morning, guys.

Good morning, Dave.

Good morning.

I guess my first question, is a little bit theoretical -- an impressive job in generating the liquidity, but what I'm trying to understand is with the relatively large owned land position right now, how do you guys think about ramping up the business when things do eventually stabilize in terms of putting the cash on the balance sheets to work and finding more lots?

How do you think about ramping up the business, maybe how big do think you could potentially get or what land position would you be comfortable with relative to putting those dollars to work.

David this is Richard.

I think it's going to be very different by market.

Candidly we've got many markets where we probably won't be in the aggressive land mode for a couple of years once we see a turn around.

And others it will be much more directed than that.

We're not looking to be big for big's sake.

We want to be profitable and internally we have a strong focus on return on invested capital.

I think from a growth standpoint, one can over do that, and we have -- you know, literally or figuratively put up a large mirror in our offices and looked in the mirror and said, "how much of what we're experiencing today could we have avoided?" and I think candidly we could have done a better job assessing our own ability to manage projects in certain areas to manage land-development activities, et cetera.

So, we're going to be prudent and careful, so when we say we're waiting to capitalize, that's not a broad bush, you know, go buy lots in every market at an equal rate.

It's going to be as return focused as we possibly can be.

But we're trying to be realistic with the outside world and not say that all of the land that we're going to buy is going to be very, very asset-like, like a number of folks are talking about, that's just, you know, in our view, not exactly the way this business works in every market.

So, it going to be selected.

So, I hear you on the owned land position.

We do have a large owned-land position.

But for that large position, we've got a number of markets that are in great shape for a few years and others that need lots.

Does that suggest maybe you put some of the cash (inaudible) more debt, is that kind of the -- maybe potential REITs, or if you don't spend all $2 billion, you know you're not looking to build the land just maybe as aggressively?

Well, I mean, that's in the range of possibilities, you know, opportunistic acquisitions of either, you know, lots or -- or -- or other, you know, builders that have attractive either geographic footprints or what have you is in the, you know, range of possibilities as well.

We wouldn't rule out anything.

I think we signal pretty strongly at this point though that for the foreseeable rest of this year at least into next year, we don't see doing a whole lot with our cash just because we don't have good visibility right now.

But that's not out of the -- you know, question.

And then maybe I could sneak one more in.

Steve, I was wondering if you could give us some more color, I think you mentioned during your comments that you felt like the rate of price declines had slowed during the quarter in a bunch of your markets, and I'm wondering if you could just give us some color on why you think that happened?

What would you attribute that to?

Yes, I would attribute it to the fact that I think on an overall basis that the new home builders have been much more aggressive than resell.

And you know, as we've moved through things I talked a little bit about commodity prices hitting us in the face.

There are some real realities out there given $130, $140 a barrel oil, that are equating to increase cost pressure in our business as well, and, you know, we're just getting down to a point where we're finding, in a lot of our markets, David, that -- that price is not the sole driver.

You know, we talked -- I talked in my prepared comments about people needing to sell their own home first before they can go out and buy, so -- you know, I think that that's attributing to a lot of it, is that we're getting down to a price point in new homes that, you know, just -- it's -- that can't get too much lower unless you really have, you know, a bunch of completed specks that are sitting out there, and clearly we don't have that anymore.

Okay.

David this is Richard, if I could just add to that, if you appreciate the fact that a huge percentage of the new-home market is dominated by small guys, the banks have, you know, lost their appetite six months ago to loan additional funding to those guys only to potentially get less back than they loaned out.

Because builders are operating at break even or below in many cases, unless a builder wants to lose more money on every transaction, it's tough to imagine pricing going a lot lower from that standpoint.

I guess you could have builders that could survive doing that for a couple of more quarters if they had a very strong financial position, but candidly not that many in the industry have a real strong financial position.

So, it kind of seems like a few factors are coming together to help triangulate around this price decline, and I will echo what Steve said.

Price is not as elastic as it was.

It's not nearly as elastic as it was.

Thank you, great detail.

Thank you.

Your next question comes from the line of Nishu Sood of Deutsche Bank.

Please proceed.

Thanks.

Good morning, guys.

Good morning, Nishu.

First thing I wanted to ask you, Richard, you were mentioning in some locations, land, you know, having been written down effectively to a zero basis.

That implies that home prices in those sorts of locations are getting down close to -- to your cash cost basically.

How -- how widespread is that do you think?

I mean -- I imagine that in -- you know, lets say the hardest hit areas and in a place like Las Vegas, that might be the case.

How widespread is that and how much of an influence is the fact that a lot of your construction costs are going up now, having on that dynamic?

Gosh, I don't have a specific answer for you on that, Nishu.

I would say it's not across the country for sure.

We still have many projects that are performing well and returning well.

I agree with you the hardest hit areas are the ones that exhibit more of those tendencies.

The cost pressures on some products we're obviously doing our best to offset on other products.

And I would say we're holding our own or maybe even performing better than some, just because of the velocity that we have and the ability to negotiate.

But it's tough out there, you know, the cost pressures on the commodity side are not abating that we have seen, so -- Roger I don't know if you have any more detail you might want to throw in there.

Oh the land side it's not very widespread, but again if you can get into the mechanics of the cash flow you begin to see that the longer life of a project, where you don't have a lot of money invested in, you have to assume that is, so you can easily come back to write off all of the land.

But to Richard's point and his earlier comment was, "why is land valuable?" Is because somebody is going to buy that land and resell it to somebody else again for a profit and for a return.

And our ability to actually have it -- write it down, and then play the future based on what we know today we've had to make those impairments, but going forward, again, appreciations there, gives us the opportunity to be able to utilize that.

You know, on the commodity's side, certainly I think we've been trying to keep ahead of that.

Steve mentioned that.

The organization is continuing to focus on the overall cost side, and I think if you look at some of the commodities still under pressure from certainly price increases, but also the demand has fallen off, so that's given us an opportunity to actually help ourselves out there.

And I know other builders will talk about that as well, and I think our organization is pushing very hard, not only from negotiating price differences, but also to continue to focus on re-engineering the homes and value-engineering the homes.

So overall, I think, you know, we've been in pretty good shape in chasing that.

But as Richard said, you know, just oil commodities and the oil derivatives is putting a lot of pressure just in shipping costs, for instance, but we continue to offset that with, you know, our focus on the cost side.

Got it.

And second question, just following up earlier questions on the opportunistic purchases of -- of land or let's say even other builders, Richard you were talking about the stickiness in pricing on the way down, you know, the bank's reluctance to lower their prices.

Assuming that that lag continues so after the housing market has bottomed, you know, takes some time for pricing to reflect the conditions, how -- how does Pulte want to be in terms of buying that cycle?

I mean, are you going to be early and aggressive purchasers?

Are you going to more moderate and cautious and wait for things to settle out?

How is Pulte going to behave -- on -- when those opportunities do come about?

Well, I think you've got to evaluate maybe two different things there.

One is that either land purchases or small-builder purchases, versus say a large-builder purchase or a moderate size builder purchase.

So, on the former it's going to be market by market selective, and I don't know that I could give you a specific answer on that.

You know, we're going to see markets turn at a very different point in time.

That based on the individual builders, in our case need for land in certain markets versus others -- will dictate our activity.

And I wouldn't characterize us specifically in any one of those buckets because that's going to be a combination of our local operators looking at things and we would look at a small builder acquisition exactly the same way we look at a piece of land, running an internal rate of return calculation based on today's pace and price assumptions for our overall investment, you know, risk tolerance, if you will.

On something broader than that, or larger than that, I would love to tell you that we would be aggressive at the exact perfect time but, you know, it has been my experience and I think, you know, well-known throughout this M&A landscape that it doesn't exactly work like that.

So, we'll have to kind of play that ball in the air and, you know, do the best job we can.

I would say as a general statement we're not looking to take undue risk.

If I had the choice between moving a little bit too late on something to, you know, hedge our risk.

I think that would probably be more prudent than doubling down with potentially a leg down to go in this downturn.

So, that's kind of the way we're looking at it, I hope that helps.

Okay, thanks a lot.

Your next question comes from the line of Ken Zener of [McQueary].

Please proceed.

Good morning, everyone.

Good morning, Ken.

Roger, I just want to get clarification, you said on the impairment benefit in 2Q was 717 basis points.

I thought it was supposed to be a lot less?

That was from the inception of going all the way back to 2006.

Okay.

So that's in line with the 175 basis points you talked about in the first quarter?

That --

Guidance?

Yes, I give two things Ken.

I usually give what we've experienced since the beginning of time on this thing, because people, you know, are trying to track that to see what the margins are.

And then I also give the forward because we took adjustments in this current quarter that will effect the future quarter, so I break is out in two components.

And I think the 175 last quarter -- I don't have my notes in front of me, but I believe that that would have been impairments that we would have taken in the first quarter that would have impacted the second quarter coming over.

Okay.

Good.

I appreciate that.

And then can you talk, just about your thought process since you are focused on generating cash which you are doing, it seems to be that you'd be willing to accept essentially break even margins to maintain volume, is that, I mean, realistic?

Well, I think our general overall approach is certainly to move product -- right.

I think if that's -- the intent is to generate cash.

You know, like other people just selling off bulk land but we're putting a house on it.

Yes, the margins are thin as obvious, you can see here.

You add back the interest expense and we're running at basically the 12% level.

So, I wouldn't consider it given away.

Certainly we're chasing down the overhead costs as the volume is certainly stressed quarter after quarter.

But overall no we're not trying to approach it that way.

That's not our strategy.

We'd like to make a bigger profit, but many times it is much more than what we want to do, it's what the environment dictates and the local sub-market in the community.

It also has to do with appraisals and everything else today, that much more influences our pricing approach.

But, certainly as Richard mentioned, cash flow is an important part of the business, so has been profitability.

Those are two measures that the organization is focused on.

So, it's not -- overall our driving strategy, but it's a byproduct of what's going on in the marketplace.

Right, no, I think it makes sense.

And final, what was your units under construction?

Not the finished specs but the units under construction?

Yes, just under 10,000 units, Ken.

Thank you.

Your next question comes from the line of Alex Barron of Agency Trading Group.

Please proceed.

Yes, thanks, good morning, guys.

Good morning, Alex.

Wanted to ask you, of your total communities -- I know you gave a breakdown of the ones you impaired this quarter, but I'm just kind of wondering, cumulatively, like what percentage of all of your communities have been impaired at least once?

Alex, this is Roger.

We've discussed that on other calls too, it's very difficult because -- some of them don't exist anymore, because we -- you know, basically close them along the way, so over this three-year period now, we've had -- you know, some that have been impaired that have actually closed out.

So, the statistic is not even meaningful to look at.

And we've got new communities that came on and old ones that rolled off, that had been impaired.

So, that's not something we track to that level of detail to be able to give you an answer that's even meaningful.

Okay.

Let me ask, I guess, as it pertains to when you guys -- just as more of a -- just kind of a methodology question, when you guys impair a community, roughly, like, what is the gross margin, you know, after it's impaired?

What does the gross margin of those homes look like?

What do they kind of go back up to?

Again, Alex, this is Roger.

They're all over the place, and it depends on the -- quite frankly the length of the project as you look at those, and so, you know, they could range 10%, 12%, 14%, down to 8%.

You know, so they're all over the place, it just depends on the life of the project, how much remains in the project, all of those things are considered as you take a look at those.

The overhead cost in a particular community are indicative of what the margins, you know, should be as well, so low overheads, you don't need high margins.

High overheads you need higher margins, so there's no rule of thumb that would be a general statement that says that, you know, that's directional, because every one of them is different.

What is the reason, I guess, that, you know, the margins don't go back up to like, some kind of a more normalized level like 25% that would allow you to kind of earn, you know, a profit on that?

I think the -- overall the pricing environment is certainly it.

You know, the reason for the impairments is quite frankly because the pricing has been coming down, and also that the land costs were associated with the prices when they were higher.

So those -- those couple of things in conjunction also now with some of the pressures on the commodities side, all moving in a direction, quite frankly, that says you're not going to have 25% margins.

But if you, again, step out of the time period and look ahead, if you've got a project that may last three, four, more years, it's not unreasonable to think there may be appreciation coming back after we get out of the bottom of this market.

Supply and demand will dictate that as well, but overall it's not something that you're going to experience today.

It's something that, you know, may be in the future, but quite frankly it's very hard to see that at this point.

Okay.

And have you guys actually bought any new land in this last quarter?

Not outside of rolling options, just new land deals that you found that were pretty cheap or something like that?

No, just as I mentioned we only did about $12 million in rolling lot option takedowns in the quarter.

Okay.

Thanks a lot.

Thanks, Alex.

Your next question comes from the line of Megan McGrath of Lehman Brothers.

Please proceed.

Hi, thanks.

Just a quick follow up to an earlier question.

I'm wondering if you've had chance to talk with your folks at the financing business to discuss how they may react to the loss of down-payment assistance?

Megan this is Richard.

Obviously the law is not in place yet.

We do expect it to hopefully be signed here shortly.

And candidly we're in the middle of analyzing that for a number of different varieties of potential financing.

We'll have to look at what other programs are available, what percentage of our buyers, you know, might be able to qualify under a more traditional loan program, but even so, the end of that, should the legislation that you're referring to come to pass still provides another couple of months before that goes away.

So, we're going to have to take some time to look at it.

Fortunately our business has got very strong credit scores relative to a lot of our peers and it's not an insignificant portion of our business as Roger indicated, but it's also not the lion's share.

So, we'll manage through.

But I don't have a lot of detail yet.

We just really started digging into it yesterday, candidly.

Okay.

Thanks.

And then just another quick question on foreclosures.

I'm wondering if you track -- and if you do, if you could provide any color on data on the number of foreclosures that have occurred or are occurring in active communities?

Megan in active communities that we are operating in?

Yes.

Gosh, I don't have any information on that.

Steve I don't know if you have any anecdotal info.

We don't track it at all, Megan.

But anecdotally, we haven't seen a rash of foreclosures within our own communities.

We've been fairly fortunate that way.

We've had some, obviously, in the suspect markets of Las Vegas and in Phoenix, but nothing that has grossly impaired our ability to continue to sell in those communities.

Your next question comes from the line of Susan [Berlinger] of JP Morgan.

Please proceed.

Hi, good morning.

Just a question on your joint ventures, which I know are not large.

I guess I was just looking for color.

I think you said you spent $27 million.

I just noted that the investments on the balance sheet went up, and I was just looking for any color you can give on the joint ventures.

Yes, Megan this is Roger.

As we've mentioned in the prior quarters, quite frankly we have very few of them.

We probably have three or four relatively major ones and the rest of them very minor.

But we did have one in there where we actually ended up paying down debt by about $27 million, so that was an equity investment by us and recorded accordingly.

And then we put a little bit more in for land development in that same project.

The rest of the projects relatively have been the same with not a lot of movement in and out of that, but we did end the quarter roughly with about $140, $141 million in investment, and the associated debt with that would be about $83 million.

So, if you recall last quarter it was almost one for one but now with the infusion of the equity and the pay down of the debt, quite frankly it's now about $140, $141, to about $80, $83.

Okay, great.

My second question was if you could give any color around pricing incentives.

What kind of increase you saw this quarter?

Discounts on the homes basically were relatively flat with the first quarter.

I think first quarter was roughly on average about 12.5%.

And the second quarter roughly was about 12.6%.

Now, again, the mix is all in there, but as you see some of the pricing ended up changing from the first quarter to the second quarter and the average selling price, some of that moved around as well.

Some of it's mix, some of it's product size.

But overall, as Steve had mentioned, quite frankly, you know, there wasn't a significant movement in price from the first quarter to the second quarter.

That was intentional based on, you know, the demand we were seeing and -- or the lack of demand we were seeing, to average or to drive the average price down or drive incentives up, because quite frankly as we've mentioned the last couple of quarters, it's been, you know, very in-elastic from that standpoint.

Your next question comes from the line of Carl Reichardt of Wachovia Securities.

Hi, guys.

Hi, Carl

Hi, Carl.

Steve just bottom line, if you look at your directs, ex-land, just labor materials year-on-year, what is your guess as to what the change has been?

Carl, that's a tough question.

Because it varies market to market --

Assume mix and assume that you've been working on trying to get your floor plan count down and to more efficient.

What is your sense?

Yes, I would tell you that it's roughly flat to slightly down a few percentage points.

And -- but again it's a tough thing to say, because we have changed product sizes, right?

So, we're going to see some house-cost reductions in certain markets, but -- but we're building smaller houses, and where we've seen commodity price increases, Carl, we've been able to leverage some market-share gains with our trade base on the labor side.

So, you know, as we kind of talked about in our prepared comments we're holding our own on that front.

Okay.

And probably doing better than most.

But there's a day of reckoning coming if oil stays at $130 to $140 a barrel that's for sure.

Well it isn't right now.

And then, last, just for Richard.

Richard, you made it clear on what kind of builder you think is best positioned for the initial stages of recovery.

I'm curious if you have an opinion on either geographic market or more like price point as to whether or not you would expect a certain type of price point to recover soonest?

You've got a lot of inventory.

Would it be the entry level or would you expect a better [heeled] buyer to start purchasing first, that discretionary consumer?

What are your [thoughts]?

Carl, I think it's going to be pretty consistent.

The market is so connected to the resell market, and anybody who thought the new home builders could separate themselves from the resale is just -- it's not realistic, 80% to 85% of the market is resale in this country.

So, I think it's going to be a fairly consistent recovery.

I think the one segment that could see a little bit of out-performance is the web segment.

Just because there's so many more buyers than there is available communities for that buyer.

And the only thing holding them back from a significant, you know, surge is the inability to sell their existing home.

So, that's the one segment I would say that, you know, we're probably continuing to be the most bullish on, but aside from that, I'm personally in the camp that all the way from entry level to, you know, more of the semi-custom luxury product is going to be seeing it at the same time.

Your next question comes from the line of Buck Horne of Raymond James.

Please proceed.

Two quick ones.

Where do you see the average community count going by year end and into 2009?

And then secondly, what's the average square footage of the homes you closing now, versus where that was a year ago, and how that is going to change going forward?

Yes, this is Roger, Buck.

We talked at the beginning of the year, quite frankly, of being down maybe around 15% in community counts by the end of the year, and certainly that takes into a lot of assumptions where we get there, but that was -- that was the original thought to start the year with, and the fact that we're not adding more communities as we go on, again, that's really based on pace coming out of it.

The average square foot quite frankly is all over the place.

We don't really track average square foot, but certain segments we try to bucket them, but overall we don't have an average for the total company.

Buck, I think the best -- this is Richard -- to tell you on that is it's coming down.

As we have repositioned many communities, including some web communities, who attempt to capture a little bit more affordability.

But Steve, do you have any more detail on the specifics on the square footages.

No, to Rogers point, we don't track it specifically, but anecdotally, Buck, to Richard's point it is coming down.

Okay.

Alright, guys, thanks.

At this time I would like to turn the call back over to Mr.

Calvin Boyd for closing remarks.

Thank you Carissa.

Thanks to everyone for your participation on the call today.

If you have any follow-up questions please feel free to give me a call.

Have a great day.

Thank you for your participation in today's conference.

You may now disconnect.

Good day.