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D.R. Horton, Inc. (NYSE:DHI)

Q1 FY08 Earnings Call

May 06, 2008, 10:00 AM ET

Executives

Donald J. Tomnitz - Vice-Chairman, President and CEO

Stacey H. Dwyer - EVP and Treasurer

Samuel R. Fuller - Senior EVP

Bill W. Wheat - EVP and CFO

Analysts

Mike Rehaut - J.P. Morgan

Stephen East - Pali Research

Carl Reichardt - Wachovia Securities

James Wilson - JMP Securities

Megan McGrath - Lehman Brothers

Nishu Sood - Deutsche Bank

David Goldberg - UBS

Joel Locker - FBN Securities

Larry Taylor - Credit Suisse

Susan Berliner - Bear, Stearns & Co.

Jay McCanless - FTN Midwest Securities

Scott Cavanagh - Merrill Lynch

Alex Barron - Agency Trading

Jane Haugh - Dwight Asset Management

Eric Landry - Morningstar

Timothy Jones - Wasserman & Associates

Randy Raisman - Durham

Operator

Good morning. My name is Cynthia and I’ll be your conference operator today. At this time, I would like to welcome everyone to the D.R. Horton Incorporated, America's Builder, the largest homebuilder in the United States, 2008 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Don Tomnitz, President and CEO. Sir, you may begin your conference.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Thank you, Cynthia. Thank you and good morning. Joining me this morning are Sam Fuller, our Senior Executive Vice President of Finance; Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer. Before we get started, Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Some comments made on this call may constitute forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such state statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and the most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Thank you. Net sales orders for the second quarter were 7,528 homes, $1.7 billion, compared to 9,983 homes, $2.6 billion, in the year-ago quarter. Our average sales price on net sales orders in the quarter decreased approximately 15% from a year ago to $220,800. Our second quarter homebuilding revenues were $1.6 billion compared to $2.6 billion in the year-ago quarter. Our average closing price for the quarter was down 8% to $237,800 compared to $257,500 on the year-ago quarter, reflecting the softer pricing environment compared to the prior year. Sam?

Samuel R. Fuller - Senior Executive Vice President

Our gross profit margin on home sales revenues in the second quarter before inventory impairments and land option write-offs was 9.4%. This was an 830 basis point decline from our home sales margin of 17.7% in the year-ago period. 570 basis points of the margin decline was due to core margin deterioration resulting from an increased use of sales incentives relative to last year and the lack of pricing power as reflected in our 8% decrease in average closing price. The majority of the remaining margin decline from the year-ago quarter was due to an increase in the amortization of capitalized interest and property taxes as a percentage of home sales revenues. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

During our second quarter impairment analysis, we reviewed all projects in the company and determined that projects with a combined carrying value of $3.7 billion had indicators of potential impairment. We evaluated these projects and determined that projects with a pre-impairment carrying value of $2 billion were impaired.

We recorded inventory impairments of $817.1 million as a charge to cost of sales to reduce the carrying value of these impaired projects. Over 80% of these charges related to projects in our California, Southeast, and West regions. Of the remaining $1.7 billion of evaluated projects, which were not impaired, the majority are located in Arizona, California, and Florida. During the second quarter, we also recorded $17 million in write-offs of earnest money deposits and pre-acquisition costs related to land option contracts that we do not intend to pursue. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Homebuilding SG&A expenses for the quarter was 12.8% of total homebuilding revenues compared to 11.3% a year ago. We have continued to react quickly to the market to manage our SG&A levels relative to our number of home closings. In the second quarter, we reduced total SG&A expenses by approximately $88 million or 30% compared to the same period in the prior year on 31% fewer closings. We are making adjustments today to position the company to return to our long-term goal of keeping SG&A at 10% of homebuilding revenues each fiscal year. We will continue to focus on being the low-cost operator in the industry, which remains one of our distinct competitive advantages. Sam?

Samuel R. Fuller - Senior Executive Vice President

We recorded approximately $11.2 million in interest expense during the quarter. Since we have continued to reduce both our residential inventory and our development activity, our active inventory did not exceed our homebuilding debt levels this quarter. So, we expensed the portion of our homebuilding interest incurred. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Our Financial Services operations remain profitable, as we have proactively adjusted expense levels to lower volumes and adjusted product offerings to the current restricted mortgage environment. Financial Services' pre-tax income for the quarter was $11.9 million compared to $7.3 million in the year-ago quarter. 92% of our mortgage company's business was captured during the quarter, reflecting our continued focus on supporting the homebuilders’ business. In the second quarter, our company-wide capture rate was 63%, our average FICO score was 708, and our average cumulative loan-to-value was 91%. Our product mix in the first quarter was 95% conforming, 3% agency eligible Alt-A, and 2% jumbo. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

During the quarter, we recorded a valuation allowance of $714.3 million against our deferred tax assets. $385 million relates to the deferred tax assets that existed at the beginning of the year, and the remainder represents a valuation allowance for deferred tax assets created during the first six months of fiscal 2008. The net remaining deferred tax assets of $545.5 million at March 31st are expected to be realized in fiscal 2008 and 2009 through net operating loss carry-backs to tax years 2006 and 2007, including subsequent reversals of existing taxable temporary differences. The full effect of the deferred tax valuation allowance is reflected in our income tax expense of $421 million during the quarter and $347 million during the six months ended March 31st, 2008. Sam?

Samuel R. Fuller - Senior Executive Vice President

Our reported net loss for the quarter was $1.3 billion or $4.14 per share. For the six months ended March 31st, 2008, we reported a net loss totaling $1.4 billion or $4.55 per share. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Our overall inventory decreased by approximately $700 million, excluding the impairments during the quarter. We reduced our total number of homes in inventory to approximately 15,100, down 62% from 40,000 homes of our peak in June 2006 and down 13% from 17,300 homes of December 2007. We also reduced the absolute number of speculative homes in inventory by 28% this quarter to approximately 7,100 homes compared to approximately 9,800 homes at December 2007. We had 3,200 completed and unsold homes in inventory at the end of the quarter, down 40% from 5,300 at December 2007. We plan to continue to adjust both our total number of homes in inventory and our number of speculative homes in the coming quarters to match our current demand. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Our land and lot acquisition spending remains limited and we continue to restructure our land development spending in light of our current absorptions. We still expect our fiscal 2008 land and lot acquisition and land development expenditures to total between $500 million and $1 billion for the entire fiscal year. We continue to develop smaller phases and pace our development of new phases based on current demand in the individual communities. Sam?

Samuel R. Fuller - Senior Executive Vice President

Our supply of land and lots at March 31st, 2008 was approximately 181,000 lots owned and controlled, down 49,000 lots from the beginning of the fiscal year. 78% of these lots are owned and 22% are auctioned. Our 181,000 lots now represent a 5.2-year supply based on trailing 12 months closings. We continue to actively work to reduce our owned land and lot supply through building and closing homes, as well as through opportunistic land and lot sales. Our net earnest money deposit balance at March 31st was approximately $59 million on a remaining purchase price of $900 million. Our low earnest money deposit balance reflects our conservative approach to land and lot options. We have no unconsolidated joint ventures and we rarely use land bank arrangements. So, our deposits are typically a low percentage of the purchase price. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Our reduction in number of homes and lots in inventory helped us generate $452 million in operating cash flows in the quarter, resulting in a $560.9 million cash balance at March 31st. We have generated positive cash flow in each of the past seven consecutive quarters for a total of $3.2 million in operating cash flows over the last 21 months. Our goal for the remainder of 2008 is to continue to generate additional positive operating cash flow. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

As we announced in our press release today, we have declared a quarterly dividend of $0.075 per share. While we remain confident in our ability to continue to generate cash flow from operations and our long-term ability to generate profits, we continue to prioritize balance sheet strength and preservation of capital in the current challenging environment. We anticipate that our quarterly dividend payment will remain at this amount for the following three quarters. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Our homebuilding leverage ratio, net of unrestricted cash, was 42.9% within our target operating range of less than 45%. We had no cash borrowings outstanding on our homebuilding revolver at quarter end. During the quarter, through an unsolicited transaction we repurchased 365... $36.5 million of our 9.75% senior subordinated notes due 2010 for a purchase price of $36 million plus accrued interest. The gain of $500,000 is included in homebuilding other income for the six and three-month period ended March 31st, 2008. Donald?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

The bright points of our second quarter includes Stacey going through our last paragraph. The bright points of our second quarter included, cash flow from operations over the first half of fiscal year '08 exceeded $1 billion versus our goal of $1 billion for the whole fiscal year. Cash flow for the last seven quarters exceeded $3.2 billion. Our cash balance, which is approximately $560 million, up from $129 million at the end of the first quarter.

Our reduction in the inventory, our homes were down 13%, our specs down 28%, completed specs down 40%, land and lot supply down 21% in the first six months of the fiscal year. Net homes sold increased 77% from our December quarter to 7,528 homes. Our cancellation rate improved for the first time in many months and quarters to 33% from 44% in our December quarter. Homes in backlog increased 10% from December 31st, 2007 to 8,947 homes. Our SG&A decreased 30% year-over-year on a 31% decrease in homes closed.

Our leverage remains on our target range of less than 45%. We have the highest equity in the industry currently of $4.1 billion. As Stacey said, we repurchased $36.5 million of high coupon debt in the 9.75% quarter debt and booked a $500,000 gain. In conclusion, we continue to operate in a very challenging environment. Our people continue to outperform the competition, although this requires day-to-day adjustments to meet the market in every city, every community, and on every home sale.

We continue to adjust our SG&A to right-size our company relative to ever-changing demand. D.R. Horton just completed its sixth consecutive year as the largest homebuilder in America with the best operating model in the industry. Our goal is to continue to improve our operating metrics and to lead the industry, as we strive to reach the other side of this current housing market. Many thanks to all of the outstanding D.R. Horton people who make this possible.

On another note and before we move on to questions, Sam Fuller, our Senior Executive Vice President of Finance, plans to retire at the end of May. I have no idea why he'd be leaving the industry at this point in time [inaudible]. Sam has been with us since 1991 and his first job was to consolidate information for the D.R. Horton family controlled companies in preparation for the D.R. Horton IPO in 1992. He has served as our Controller, our CFO and Treasurer, and now our Senior Executive VP of Finance. We sincerely appreciate the contributions that Sam has made to our company over the last 17 years, and we hope he finds enjoyment trying to improve his golf game, finds pleasure in his new motor home, and he survives drinking his way through his wine collection. We’ll miss him at our annual wine tasting [inaudible] for many years and perhaps if we can entice him out of the pleasure of his motor home, we can get him back to cheer our wine tasting events [inaudible] in the future. So, Sam, we’ll miss you.

Samuel R. Fuller - Senior Executive Vice President

Thank you.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Now, we’ll entertain any questions you may have.

Question and Answer

Operator

[Operator Instructions]. Your first question comes from Michael Rehaut of J.P. Morgan.

Michael Rehaut - J.P. Morgan

Hi, good morning everyone.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning, Mike.

Michael Rehaut - J.P. Morgan

The first question was just on the gross margins. I was wondering if you could give us some color in terms of how much of that might have been impacted by the aggressive spec reduction in terms of the year-over-year decline and how much of that is maybe more of just where the market is today, and also perhaps how much did the gross margin benefit from prior impairments?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, before Bill Wheat gives you the specifics, Mike, frankly a lot of the margin runoff in the second quarter was directly attributable to as we said at the end of our first quarter that we are going to increase sales and we had empowered our salespeople to sell our aged inventories. So, a lot of that margin runoff has been directly related to our desire to clean our inventory and to start with a clean slate in beginning of third quarter.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

And a little bit of specifics to that, Mike. About 40% of the homes that we closed this quarter were completed, unsold homes at the start of the quarter. So, clearly a portion of our closings this quarter were homes that we were aggressively looking to move.

Michael Rehaut - J.P. Morgan

Okay. So, would you think that that would have given you like, those spec homes closed would have been like… give a sense for if it was like a 200 basis point, 300 basis point impact. And also, can you give us a sense for the benefit of homes sold in the quarter that were previously impaired?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

In terms of the margin differential on the closings of those... of those completed homes, the margin differential between those homes and the other homes that we closed during the quarter was certainly greater than 300 basis points during the quarter. And in terms of the impact of previous impairments during the quarter, about 22% of our closings during Q2 were in communities that had been previously impaired. So, that should give you a sense of the impact there.

Michael Rehaut - J.P. Morgan

Okay. Second question was just going to be on the cancellation rate, we noticed that it ticked up a bit as a percent of backlog, and I was wondering if you could comment on perhaps the drivers of that and if that also gives you any type of concern in terms of spec being an issue or remaining an issue or a challenge over the next couple of quarters?

Stacey H. Dwyer - Executive Vice President and Treasurer

It was really, Mike, the way that we have consistently measured our cancellation rate has been as the percentage of our net sales, and as a percentage of our net sales that did drop from 44% last quarter down to 33% this quarter. Our backlog actually increased this quarter, so we're optimistic that even if you look at it as a percentage of our backlog going forward, you should see some stabilization in that cancellation rate as well.

Michael Rehaut - J.P. Morgan

And in terms of the quality of buyers coming in, do you feel that they have a more difficult time getting approved? If you could just comment on the… how you're seeing the buyer walk in the door and what the current challenges are, and if those challenges have changed over the last three, four months?

Stacey H. Dwyer - Executive Vice President and Treasurer

The challenges are pretty much the same, mortgage lending has become more restrictive, but with the recent changes in the FHA and the changed limits that we have in different communities across the U.S., we’re actually seeing people able to use FHA financing at even higher price points, and that’s making the process a little bit easier for people in price points that would have previously only qualified for jumbo loans.

Operator

Your next question comes from Stephen East with Pali Capital.

Stephen East - Pali Capital

Good morning.

Donald J. Tomnitz - Vice-Chairman, President, Chief Executive Officer

Good morning.

Stephen East - Pali Capital

I guess if you look at… Don, if you look at your land supply and where you are now, you’ve brought it down quite a bit. Are you comfortable with it now, ignoring the spec issue, which you are making the headway on to? But just looking at your total land supply, are you comfortable where it is or do you need to do some bulk land sale type situations?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I'd answer your question directly. We believe our current land and lot inventory is a little high relative to our trailing 12 months closings, which puts our land and lot supply somewhere right around 5.2 year supply. We'd rather see that closer in the 4s and if possibly down even to the 3s.

Stephen East - Pali Capital

Okay. And then as you look at your... California was awfully weak last quarter, this quarter you more than made up for it with your Un-Auction. Is that a process that continues across the company as you try to reduce specs?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, I believe that if you look at where our spec count is today, we are sitting on right at about 48% specs, which is right around 7,000 units. Our inventory is about 15,000 units. I think that our specs could come down somewhere into the low 40%, which would be more desirable from our perspective, maybe even to the high 30%, but the beautiful thing about where our specs are today, we are sitting on only 3,200 completed specs and we’ve got less than 400 units that have been completed and unsold for a period greater than a year. So, I think our specs are in the best position they have been in three to four quarters.

Stephen East - Pali Capital

Okay. And then just last question, your cash flow generation, Stacey said, you expected to generate positive cash flow the rest of the year. Do you all have any revised expectations since you've already hit your full-year target?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We are going to stick at $1 billion and try to improve upon that, which we will, but we are not going to revise anything at this point, Stephen.

Stephen East - Pali Capital

Okay. Thanks.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir.

Operator

Your next question comes from Carl Reichardt with Wachovia.

Carl Reichardt - Wachovia Securities

Good morning guys. How are you?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning, Carl.

Stacey H. Dwyer - Executive Vice President and Treasurer

Good morning.

Carl Reichardt - Wachovia Securities

Stacey, a hard question, but of that 15,100 units you had in unsold in inventory at the end of the quarter, do you know what percentage of those have been previously cancelled?

Stacey H. Dwyer - Executive Vice President and Treasurer

Carl, I do not.

Carl Reichardt - Wachovia Securities

Okay. We can follow up afterwards.

Stacey H. Dwyer - Executive Vice President and Treasurer

Okay.

Carl Reichardt - Wachovia Securities

And Don, I think the other Don had said or talked about the footprint that you have and have talked about whether or not that might shrink. Can you give us an update on the geographic markets that you’ve chosen to exit and kind of your philosophy there? As you know, a number of your peers have started to pull back, I think, more significantly now in the last couple of quarters, and I'd like to get your take on that.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Currently we are still in 27 states and 82 markets. I think we’ve decreased by three or four markets, but frankly very, very small markets. What we have done we think is the better answer, is to consolidate where we had duplicate divisions in the same market like we did in San Francisco where at one point in time in the Bay Area we had three divisions on the San Diego, we had three divisions and so forth. And what we’ve actually done is consolidate across the country multiple market divisions into single market divisions, and we believe that we are properly positioned in each one of those markets now such that we can capitalize on the strength in homebuilding industry as it comes back, but really we don't see any markets today, which we believe… we would believe because most of the markets still have some sound basics, although not as good as what they once were, but we believe as the market begins recovery they are very sound markets.

Carl Reichardt - Wachovia Securities

Okay. All right. I appreciate that. And enjoy your retirement, Sam.

Samuel R. Fuller - Senior Executive Vice President

Thank you, Carl.

Operator

Your next question comes from Jim Wilson with JMP Securities.

James Wilson - JMP Securities

Thanks. Good morning guys.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

James Wilson - JMP Securities

Couple of questions, the margins you reported in the quarter, can you give us any color on what margins might look like in backlog if the big sale in California had an impact that might be steeper or harder than you might see going forward or margins look pretty similar in backlog?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, the way I would answer that question and Bill Wheat can correct me, but as we go through this impairment process with Mr. Murray, who is our controller, and we go through each individual project, which we have to get Mr. Murray credit for all the wonderful impairment models. But, Ryan Borin [ph] is here.

Unidentified Company Representative

But Sam hired me.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

The real issue is as we impair these projects, we are typically somewhere 12% to 15% gross margins on a go-forward basis. To the extent that the market continues to deteriorate, obviously those 12% to 15% gross margins will be impacted. But on a look-forward basis and up to Q3 and Q4, we believe that we've got better margins ahead than what we reported this quarter.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

I would certainly concur with that and certainly one other factor this quarter that definitely hit the margins more sharply than previous quarters was the impact of our spec levels and we've moved those down dramatically. So, our expectations… certainly our hope is that we’ll see some stabilization in margins in forward quarters.

James Wilson - JMP Securities

Okay. That kind of leads to maybe a similar exciting question. Can you comment a little bit on what kind of pricing in your major markets or markets you would want to talk about, you've seen in recent order trends, I guess, since you completed the big inventory push?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, I believe that our margins across the country are…. as I said before, were running simply, we’ve gotten rid of most of our older inventory and we have very few completed specs, they are greater than a period of… been completed for a period of greater than a year. What I see our margins running north in the low teens to mid teens and most of our starts are taking place in the marketplace today.

James Wilson - JMP Securities

Okay. And just anywhere the margins are particularly better or worse that you would know, but I guess maybe the worst you've taken care of in the impairment process?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Clearly, our risk markets continue to be where we're taking most of our impairments, which happened to be in California. We took some in Arizona and also in Florida and Las Vegas, those are worse markets. We still have some... and the good markets [inaudible] good market to talk about. I mean basically most of the markets are pretty marginal at this point with the markets I pointed out, Las Vegas, California, Arizona, and Florida being the worst markets in the country right now in terms of margins.

James Wilson - JMP Securities

Great. All right. Fair enough, thanks.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question comes from Megan McGrath with Lehman Brothers.

Megan McGrath - Lehman Brothers

Hi, good morning. I just wanted to follow up quickly on your comments around spec that you're pretty happy with how you've reduced it so far. Just curious, I know this is a broad question, but what you are kind of telling your sales force these days? I think at the end of last quarter you kind of implied that you had given a lot of your sales force kind of degree you might to move the spec. What are you telling them now in terms of pricing and sort of what pace you want in the market?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, what we are telling in our salespeople clearly is, we want margins in the teens and higher, because basically we've cleared the older inventory. Now, we've got newer inventory out there with a new cost structure in it. So, combined with the impairments and reduced cost structure, we feel like that our salespeople ought to be selling 15% and greater gross margins.

Megan McGrath - Lehman Brothers

Okay, great, that's helpful. And a quick follow-up, Stacey, I think you mentioned in your commentary around tax refunds, I think you had said last quarter that you weren’t expecting to get any kind of refund in this year. Has that changed?

Stacey H. Dwyer - Executive Vice President and Treasurer

No, we’ll get a tax refund at the end of our fiscal year. And so the cash flow from that would actually happen in fiscal year 2009.

Megan McGrath - Lehman Brothers

Okay. Thanks, that's helpful.

Stacey H. Dwyer - Executive Vice President and Treasurer

During this year, we’d just be paying reduced taxes.

Megan McGrath - Lehman Brothers

Got you. Okay, thanks.

Operator

Your next question comes from Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. Good morning everyone.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Nishu Sood - Deutsche Bank

And congratulations to Sam and good luck, too.

Samuel R. Fuller - Senior Executive Vice President

Thank you, Nishu.

Nishu Sood - Deutsche Bank

First question I wanted to ask was on the timing of the dividend cut, I mean as Stacey mentioned, I think seven consecutive quarters of positive cash flow, you beat your annual target in just two quarters, you’ve got over $500 million on the balance sheet. So, we're well past two years into this downturn, you've clearly had great performance in cash flow, why cut the dividend now?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, first of all, I'd say to you one, we are a very conservative company, but perhaps the second and most important factor has to deal specifically with the fact that this was the first quarter that we reported an operating loss. We reported an operating loss of about $51 million. And I think from a prudent perspective that as long as we are producing an operating loss that it doesn't make sense to continue to play the level of dividend that we were. Our game plan is one and one only, to get back to reporting an operating profit at which point in time we will be looking at the dividend in a totally different way. But clearly when you're reporting an operating loss from an operating perspective and a management perspective, we can justify paying the complete dividend.

Nishu Sood - Deutsche Bank

So, I mean a lot of your peers have begun to kind of look past the downturn here, look ahead to opportunities. Is there any element of trying to shore up your cash flow to be able to capitalize on future opportunities?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

The opportunities we see in the marketplace are continuing to focus on our business, reducing our land and lot position, and continuing to return to operating profitability. The rest of the operating cash that we are generating we are going to keep on our balance sheet and we’ll forget how we are going to do with it later.

Nishu Sood - Deutsche Bank

Great. And second question I just wanted to ask was a follow up on what Carl was talking about earlier. Your portfolio of markets is still, I think, 80 something. You've talked about how you are reducing the number of divisions from what you're managing those regions, which is going to create some distance. And I'm thinking of a market like the Triad market perhaps, which a lot of people have tried to manage out of Raleigh or Charlotte. Have you seen any issues or difficulties in managing all these locations more remotely now that you’ve consolidated your divisions?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, first of all let me clearly say this to you, we are not leaving a division in a market operating without at least a city manager, which we’ve always had. So, to the extent that we are not going to have someone in Miami trying to manage Orlando for us or someone who is in Seattle trying to manage Las Vegas for us. We have a key operator, a profit center manager in each one of our markets managing that particular division. So, we really don't see an issue with that. I currently have eight regional Presidents overseeing those 82 markets and we feel like that we've got hands on... boots on the ground. Operating manager, profit center manager in each one of our markets.

Nishu Sood - Deutsche Bank

What have your division offices done in the past years like in terms of number wise, like how many of you were two years ago, how many are you now?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I couldn’t really tell you how many division offices we've deleted, I can just go through mentally or verbally with you for a few seconds. But as an example, San Francisco we had three divisions, we now have one. And in San Diego, we had three divisions, we now have one.

Stacey H. Dwyer - Executive Vice President and Treasurer

Denver.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

And Denver, we had four divisions and now we have one. So, we’ve basically gone across the country and consolidated multiple divisional operations into a single division, which has caused us to be able to reduce our people and also to be more prudent in terms of operating in that market.

Operator

Your next question comes from David Goldberg with UBS.

David Goldberg - UBS

Thanks, good morning.

Stacey Dwyer - Executive Vice President

Good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

David Goldberg - UBS

I'm wondering if you could tell me a little bit of how much you think foreclosures and prices on foreclosures are impacting the prices in your neighborhood.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I think that's difficult to say at this time. And if you look across the country, I don't believe foreclosures are a significant part of the market. Yet in the vast majority of our markets, I think Las Vegas, they are impacting that market considerably as to… and I think it's impacting the Phoenix market considerably, just by virtue of the number of existing homes on the marketplace. But other than that, David, I think that's really difficult to determine, and I also believe that we are positioning the company as we look forward in the second half of calendar year '08 and all of calendar year '09. I think foreclosures are definitely going to have a negative impact on the new home market and that's the way we are positioning the company.

David Goldberg - UBS

Maybe, I can get a follow up to an earlier question about the new land and the base, some of these new lots that you're bringing through versus whatever you call that the old inventory that you’ve already sold. You kind of have no percentage difference in terms of raw land or developed land cost between the two?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Let me first of all clarify, we are not really bringing on any new land or lot positions. If you recall, last year we said that we would spend, we said that we're going to spend somewhere between $500 million and $1 billion in land and land development and lot acquisition. We ended up spending less than $1 billion and our goal for this year is the same, just been somewhere between $500 million and $1 billion. So, we're not really bringing on any new land parcels and we really don't need to bring out any new developed lots, I mean whereas simply because we’ve got more than adequate lots to supply, what our current building program looks like on a 12-month basis.

Stacey H. Dwyer - Executive Vice President and Treasurer

Yes, I think what Don was referring to earlier, David, was with the impairments that we've recorded that will adjust the lot cost basis on homes that we’ll be closing going forward, but that's not necessarily on new land that we're bringing into the company.

David Goldberg - UBS

Sure.

Stacey H. Dwyer - Executive Vice President and Treasurer

In addition to the land that we own, we will continue to close selected lot from rolling option contracts. In those contracts, we’ll have been renegotiated.

David Goldberg - UBS

Sure. So, I guess maybe then the right way to say this between the impaired land that you're bringing on now versus the land that was unimpaired that you were bringing through before, given the idea with the difference maybe like a percentage difference in terms of cost would be?

Stacey H. Dwyer - Executive Vice President and Treasurer

It's not off the top of my head, David. When we look at our lot cost as a percentage of our sales process, we haven't been seeing a big change. So, that's basically tracking with what our sales processes are doing.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Our sale prices have been declining and our loss as a percentage of our home is also very static. So, basically it tells you that we're bringing down those lot costs, which we have on a third-party developer, lot purchased or a rolling option contract. We’re decreasing those lot purchases and then obviously the impairments, and then all of a sudden also we're driving down the cost of construction. So…

David Goldberg - UBS

Okay. Thank you.

Operator

Your next question comes from Joel Locker with FBN Securities.

Joel Locker - FBN Securities

Hi, guys. Just wanted to get an account of the 141,000 or so home lots, how many of those are fully developed?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Today, roughly about 35% of our total lots owned are fully developed today. And another factor along those lines is when we look at our projected closings for fiscal '09, substantially all of the lots that we need for those closings are fully developed.

Joel Locker - FBN Securities

All right. So, that would be 49,000, just to clarify, or so?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Yes.

Joel Locker - FBN Securities

And just… and then your finished lot count, I think at the end of the last quarter, was around 65,000 to 75,000, I think you stated in the conference call. Is it still around there or has that been brought down by the impairments?

Stacey H. Dwyer - Executive Vice President and Treasurer

I'm not sure we've given a finished lot count before, Joel.

Joel Locker - FBN Securities

No. I mean finished lot as in price per lot, I think on the last conference call, the cost was averaged around 65,000 to 70,000?

Stacey H. Dwyer - Executive Vice President and Treasurer

Yes. About 30% of our ASP, that would be about right.

Joel Locker - FBN Securities

30%.

Stacey H. Dwyer - Executive Vice President and Treasurer

And as I mentioned before, that's pretty much still tracking with our ASP, so our lot cost will be dropping a little bit.

Joel Locker - FBN Securities

Right. All right, thanks a lot.

Stacey H. Dwyer - Executive Vice President and Treasurer

Thank you.

Operator

Your next question comes from Larry Taylor with Credit Suisse.

Larry Taylor - Credit Suisse

Thanks very much. I wonder if you could comment on the direction of pricing and how you anticipate that unfolding both for yourselves and further competition over the next 6 to 12 months?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Well, clearly in this past quarter we met the market and it was not a very pretty meeting, and prices did decline in the quarter as we reported. On a going-forward basis, we are most concerned about the level of foreclosures entering the market. And I think to the extent that those are significantly greater than what they are currently and that's going to negatively impact our pricing moving forward.

Larry Taylor - Credit Suisse

Okay. Thank you very much.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Yes.

Operator

Your next question comes from Susan Berliner with Bear Stearns.

Susan Berliner - Bear, Stearns & Co.

Good morning. And Sam, best of luck to you.

Samuel R. Fuller - Senior Executive Vice President

Thank you, Susan.

Susan Berliner - Bear, Stearns & Co.

I was just wondering if you could update us on your tangible net worth covenant, where you guys are on that?

Stacey H. Dwyer - Executive Vice President and Treasurer

Okay. Our tangible net worth covenant is at $3.5 billion. And as of March 31st, we had a cushion of about $290 million.

Susan Berliner - Bear, Stearns & Co.

So, is there any thought, I guess, of going back to the banks now, and I guess getting the deferred taxes added back in or how are you looking at that in light of the market?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

I think to answer your question directly, yes.

Susan Berliner - Bear, Stearns & Co.

Okay. And I guess if I could just ask one more, with the cut in the dividend I guess what would it take to cut the dividend or get rid of the dividend going forward?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I'd say to you that our operating losses would have to continue in increasing rate relative to where they are today.

Susan Berliner - Bear, Stearns & Co.

Okay, thank you.

Operator

Your next question comes from Jay McCanless with FTN Midwest.

Jay McCanless - FTN Midwest Securities

Hi, good morning. I wanted to ask on your gross margin outlook, as you are talking about low to mid teens. How much of the recent price increases are factored into that and what do you see for building material price increases going forward?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, the price increase you are talking... you are confusing us because we have now a chance to increase prices on a while, so what you're referring to about price increases?

Jay McCanless - FTN Midwest Securities

Well, in terms of lumber, shingles. We're seeing increases in drywall prices just your cost of materials that go into the home.

Stacey H. Dwyer - Executive Vice President and Treasurer

Yes, one of the things that we are very diligently doing right now is continue to negotiate prices down and while you may see published national prices moving up, we would generally have locked in prices with our suppliers for some period of time, so that we're not subject to those price fluctuations in the short time.

Jay McCanless - FTN Midwest Securities

Okay. And then one another question if the prices that you closed at in different regions this quarter, assuming that the recent increases in the FHA and the GSE loan limits don't go through, don't get re-passed I guess you'd call it for '09. How much… if you can just estimate how much of your closings would have been either FHA or conforming compliant?

Stacey H. Dwyer - Executive Vice President and Treasurer

It’s not going to be significantly different than what we reported already. We had only 2% jumbo, I believe, this quarter and I don't remember the exact number last year. But I know… excuse me last quarter it was no more than 4%. So, our pricing mix really hasn't changed because of the FHA limits.

Jay McCanless - FTN Midwest Securities

Okay, great. Thank you.

Stacey Dwyer - Executive Vice President

Thank you.

Operator

Your next question comes from Scott Cavanagh with Merrill Lynch.

Scott Cavanagh - Merrill Lynch

One quick housekeeping question. Looking at our borrowing base, how much is actually available on your revolver?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Right now at the end of the quarter we have approximately $1.3 billion available under our borrowing base arrangement.

Scott Cavanagh - Merrill Lynch

Thank you very much.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Okay.

Operator

Your next question comes from Alex Barron with Agency Trading.

Alex Barron - Agency Trading

Folks, good morning. How are you?

Stacey H. Dwyer - Executive Vice President and Treasurer

Good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning, Alex.

Alex Barron - Agency Trading

I wanted to ask you, I guess I have noticed that a lot of builders have reduced their inventory practically to zero and are trying to move to a built to order. And other builders, I guess, are still continuing to spec build and drop prices to try to, I guess, blow through their inventories. I'm trying to figure out which of the two, I guess, are you guys pursuing?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, let me answer the question very succinctly for you. We had excess inventory in a number of our markets at the end of Q1. So, basically we decided that we would clear that excess inventory and on a going-forward basis what our game plan is, is to keep a minimum number of specs in each one of our communities, and hence you see our number of specs having declined significantly. But we believe we need to have limited number of specs in each community in order to satisfy relocation buyers, as well as realtors who sell a big percentage of our homes. We're looking to book people on our home in 30 days to 60 days.

Alex Barron - Agency Trading

Okay. Sorry go ahead.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Go ahead.

Alex Barron - Agency Trading

I was going to say with that said, I mean at this point, what are you seeing as kind of a worse competition? What other builders are doing to survive or what banks are doing to blow out their foreclosures?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, I don't think there are a significant amount of foreclosures ever been blown up by the banks today, although that could increase where we find… where we have a leg up with a number of our competitors in most of our markets is, a number of our competitors have had a zero spec policy, which has put them in a more difficult position in terms of satisfying relocation buyers and realtors. And I think that cordons [ph] always had in the past, and on a going-forward basis, we’ll maintain a limited number of specs in each one of our communities and keeping a limited number will give us more pricing power than at the end of the first quarter when we had excess number of specs in our communities. So, we've got our spec community count down at the right level we believe relative to current demand, and we ought to be able to derive a higher margin on those specs going forward.

Alex Barron - Agency Trading

Okay. Just kind of on a separate topic, I know you guys have impaired more communities and some of them are re-impairments, but I guess what percentage of your total communities have been impaired to date, whether it's at least one time or doesn't matter how many times?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

About 25% of our total communities have been impaired, Alex.

Operator

Your next question comes from Jane Haugh with Dwight Asset Management.

Jane Haugh - Dwight Asset Management

Hello. I just had a question about the balance sheet and your planned use of cash. Can we expect you to be in the market buying back more of your higher cost debt, which seems to be cheaply priced at this point? And just looking at leverage and what your philosophy is going forward with the use of your free cash flow?

Stacey H. Dwyer - Executive Vice President and Treasurer

We are focused right now on preserving our cash position and maintaining a lot of flexibility and liquidity. We have $585 million in senior notes that come due next January and February, so we're certainly going to be making sure that we have adequate cash to retire those notes. Past that, we will look opportunistically as we did this last quarter at some of our higher coupon debt.

Jane Haugh - Dwight Asset Management

Okay. Thank you very much.

Stacey Dwyer - Executive Vice President

Thank you.

Operator

Your next question comes from Eric Landry with Morgan Star [ph].

Eric Landry - Morningstar

Good morning, Morningstar. Thank you.

Stacey Dwyer - Executive Vice President

Good morning.

Donald J. Tomnitz - Vice-Chairman, President, Chief Executive Officer

Good morning.

Eric Landry - Morningstar

My question revolves kind of around inventory flow. There are a number of competitors that will be building from fresh land here at some point in the not so distant future, while Horton has quite a long land position right now. Is it a case where you would consider mothballing and living with lower asset turns in order to refresh land to be more competitive with some of these land light competitors or how are you looking at that?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I guess I'd like to know who the land light competitors are?

Eric Landry - Morningstar

Well, l mean less land heavy, how about that?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Who is less land heavy than we are?

Eric Landry - Morningstar

MDC, KB Homes.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Okay. And I think both of those people have rather marginal sales last quarter also. So, I don't look upon them as...

Eric Landry - Morningstar

Okay.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I'm looking at the top five or six builders as our major competitor. And I feel like we've got the maximum flexibility to continue to produce home that’s competitive in the marketplace and I think to drill down and maybe answer your question more directly, we are going to build through our existing land supply and lot supply as we've done to the extent that needs to take impairments then we are going impair it and we are going move through it. One of the things that Horton has consistently done is we have not done any bulk sales and as we work through our land and lot position, it might be interesting for you to know that we are deriving 50% plus of our value of that... original book value of that land by building and selling home as opposed to selling as a bulk sale. So, that’s where… our plan is, if it needs to be impaired we are going to impair it and we're going to continue to build through it and we got a better return on our money that's in the ground by building a house on it and selling it and by selling it to an investor at a bulk sale.

Eric Landry - Morningstar

And you’ve mentioned that you would like to lighten up on lands, have you got any kind of a target as far as inventory turns going forward, if you had your druthers?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, what we are really focused on because inventory turns are sort of a difficult situation to analyze. We have tried to help the investment community analyze that over the years because clearly we don't have any joint ventures and a whole host of other things that we have done. So, when you look at inventory turns, you’ve got to really suck out all that excess and do it on an apples and apples basis. We're trying to get too specifically, right now we are at a 5.2-year supply of land and lots, I'd much rather see that at the high-3 and low-4 level.

Eric Landry - Morningstar

Okay.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

In terms of your supply.

Eric Landry - Morningstar

All right, thanks.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes.

Stacey H. Dwyer - Executive Vice President and Treasurer

Thank you, Eric.

Operator

Your next question comes from Timothy Jones with Wasserman & Associates.

Timothy Jones - Wasserman & Associates

First of all, Sam, I am going to miss our chat.

Samuel R. Fuller - Senior Executive Vice President

Me too, Tim.

Timothy Jones - Wasserman & Associates

Good luck to you.

Samuel R. Fuller - Senior Executive Vice President

Thank you.

Timothy Jones - Wasserman & Associates

I got in a little late and maybe if you covered this, I apologize. The first question is I don't quite understand why you took $245 million of impairments in this first quarter and $834 million in the second quarter, three times as much, but market didn't get that much worse?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Well, to answer your question directly, Tim, we moved through a lot more inventory in Q2 than we did in Q1. We increased our sales significantly in Q2 over Q1. We decreased our number of specs and we decreased our number of completed specs substantially. As we did that, we had to meet the market and once we met the market we have to adjust our inventory vis-à-vis impairments.

Timothy Jones - Wasserman & Associates

And secondly on the deferred tax, taking the charges on the deferred taxes, I was talking to you guys three months ago and six months ago and about this subject and you said you didn't have to do it because last year you in fact even paid income taxes while all of a sudden in the second... I know you had the impairment, but why in the second quarter did you do it when you implied, you really had a cushion for both the last two fiscal years. I advice that you are going to lose a lot more money this year.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

I think the big difference was frankly what we did in Q2 and that is by virtue of having dropped our sale prices in order to meet the market and created additional losses and as a result, that impaired that deferred tax asset, real simple answer. And we do still have significant carry-backs available to us for '06 and ‘07, but we are to the point now where with the losses that we do have, we do feel like the deferred tax assets we created are in excess of what we will be able to realize in the short term. And the accounting rules won't let you necessarily count 20 years of future profits when you are in a loss position.

Timothy Jones - Wasserman & Associates

Especially if you had ENR [ph]. Never mind, lastly, sorry to guess one more, but you talk about that land costs are right now 30% of your average sales price, I mean you never wanted them to be over 25%.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

But we…

Timothy Jones - Wasserman & Associates

22% TO 25%, NORMALLY

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Stacey, I don't think, said that. Basically as a percentage of the sales price of our house…

Timothy Jones - Wasserman & Associates

Yes.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Our lot has always been somewhere right around 20% to 22% and it still is there.

Timothy Jones - Wasserman & Associates

But what was the 30% number that Stacy gave out.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

That was cost.

Stacey H. Dwyer - Executive Vice President and Treasurer

That was cost.

Timothy Jones - Wasserman & Associates

Lot cost. Thank you.

Operator

Your next question comes from Randy Raisman with Durham.

Randy Raisman - Durham Asset Management

Hi, just a couple of quick questions on the land spend guidance of $500 million to $1 billion, is that… can you break that up between how much is land development on land that you already own versus how much is new land that you guys are going to be taking down?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Yes, I can… I can’t break it down for you, but let me give you these numbers. That $500 million to $1 billion will take care of new land acquisitions, any rolling option lot purchases, any earnest money that we put up, as well as any development costs that we will incur. So, I will tell you that the… if you divide all that up and really put into separate buckets, which we really don't have a feel for right now, it’s going to be around in there.

Stacey H. Dwyer - Executive Vice President and Treasurer

Yes. The land acquisition any type of bulk land acquisition would be the smallest portion in that, and that would go to development cost and rolling lot options foreclosings in fiscal '08 into '09.

Randy Raisman - Durham Asset Management

Yes, because that was my question basically. I mean I don't understand why you would have to take down any lots essentially, right?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Well, we have lots that we are purchasing from third-party developers where we are in subdivisions where we are selling homes and we’ll continue to close those lots. And frankly there are option contracts out there that are coming to the market where we are putting up our 3% to 5% earnest money against the purchase price to tie up those lots, foreclosings in '09 simply because they are coming back to the market and are very attractively priced.

Randy Raisman - Durham Asset Management

Is that the way to think about that if you're building a community where it's build on land you have been taking down on a rolling basis, kind of once you start building and start taking land that you have to and continue taking down land or can you cut it off at any time?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We can cut it off at any time. And I don’t know the exact number of the earnest money that we've written off, but we wrote off another $10 million worth of earnest money this quarter. We would walk from the earnest money in New York, if it didn't make sense.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

And the other thing we can do is that we can renegotiate the pricing on those finished lots as we are working through the option contract as well to meet the current market.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Most of our… virtually every rolling option contract that we currently have on the books is one where we've renegotiated the lot price downward either that or we renegotiated the takedown, whatever we needed to do to make it more palatable to meet our margin requirements.

Randy Raisman - Durham Asset Management

And can you give us any color as to kind of what those renegotiated prices look like, just ballpark, a very high-level number?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

It’s got it very so dramatically from one part of the country to the next, as well as from one subdivision to another, for example in Houston, where we renegotiated a couple of lot contracts in Houston recently, it’s just a wide range, in some instances we’ll scrap it around for… on our $30,000 lot trying to get it reduced to $27,000 or $28,000 and we may have another lot where we’ve got them under contract, whether it is $75,000 and we are saying they are only worth $35,000.

Randy Raisman - Durham Asset Management

And those are rollouts or those are finished lot?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Those are finished lots. A developer, third-party developer has bought the land, improved the lots, but the streets, the water lines, [inaudible] and they are ready to have a home built on it.

Randy Raisman - Durham Asset Management

Okay, great. Thank you very much.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir.

Operator

Your next question comes from Bob Sells [ph] with LNK Capital Management.

Unidentified Analyst

Did you say… I think you referred to some SG&A reductions during the quarter, did you allude to what the run rate would be going into the next quarter?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

No, we did not. What we did say is our goal is to get our SG&A back down to a 10% of revenues level and our goal is to try to get that done by the end of the fourth quarter, this figure.

Unidentified Analyst

Can you gives any indication of where it would be… how much we have reduced on an absolute basis for Q3?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Not at this point, no.

Unidentified Analyst

Okay.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

We just left our Presidents bidding, each have a goal and we met with our regional Presidents twice, once on a Tuesday, once on a Thursday. So, that they could have two days in between to figure out how they can get their SG&A down to 10% by fiscal year-end '08?

Unidentified Analyst

Okay, and then did you say the can rate was lower this quarter than last quarter?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Yes, it's 33% this quarter, 44% last quarter.

Unidentified Analyst

And I'm curious about that number because just observationally it seems like the real tightening on very high loan-to-value loans and the banks just being selective about where the right mortgages. It came this… just in the last couple of months as opposed to the fall months.

Stacey H. Dwyer - Executive Vice President and Treasurer

I think really in the fall we saw that begin to have an… jumbo loans in particular were really impacted in August. Then we saw a spike in our cancellation right in September and then just throughout the fall, we saw continued tightening loan program that were there one day that weren’t available the next day, and really into this quarter, we’ve seen that settle down a little bit. The loan programs haven't changed this rapidly. The standards are much tighter, but they are consistently tighter.

Unidentified Analyst

Right, and the impact of the raised jumbo loan levels doesn’t appear to be reaching the market. What is your perspective on that? Just looking for conforming loans?

Stacey H. Dwyer - Executive Vice President and Treasurer

What do you mean by not reaching the market?

Unidentified Analyst

Loans that would take them out of jumbo back into conforming, looks like it hasn't hit the markets yet.

Stacey H. Dwyer - Executive Vice President and Treasurer

I don't know how to answer that one broadly. I would say within our communities if there is a product that’s available for an FHA loan, we have started to see some of those close or certainly be qualified for at the higher limits. I think there was a delay in actually having the amounts published on a county-by-county basis even after the rule went into effect. So, that may be something that you see more impact on homes closed in the next quarters.

Operator

Your final question is a follow-up question from Michael Rehaut with J.P. Morgan

Michael Rehaut - J.P. Morgan

Great, thanks. Hi, guys.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Hi.

Stacey H. Dwyer - Executive Vice President and Treasurer

Hi.

Michael Rehaut - J.P. Morgan

Just I was wondering if you could help me with, give me some color on sales pace throughout the quarter and how it varied in and around your sales events? And after you kind of did more aggressive sales events, were you hitting the sales pace with the new price that you're happy with and maybe you can give us a number in terms of what that is, two a month, three a month, four a month?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Clearly in California, the market really is driven by event type marketing. I think that's also true in Las Vegas and I think that's true in Florida. So, notwithstanding the fact that we may sell a lot of homes of those types of events, I think our sales thereafter have a tendency to trend downward and they are not sustainable at those levels, even though we’ve dropped our pricing during those special event type transactions. Clearly when we do set our pricing during those event transactions, there are number of buyers, a lot of buyers in the marketplace, in fact in California we’ve had… most of our sites have had camp outs, and Don Horton and I were in one of our sites in the desert, where we actually… actually Don Horton convinced a lady, he was grousing about not being able to buy a home from us, and he said, well, just get your car and get in the camp out line. So, she pulled her car out of parking lot and was number two in the camp out line and got her house at the price she wanted. So, I think really, Michael, to answer your question, we are now seeing a lot of pricing power out there. We are now seeing a lot of pricing stability right now. I think each as I said in my conclusion, it's a day-to-day battle on a house-by-house battle in a subdivision-by-subdivision basis and a market-by-market basis and there is yet to be any what I consider to be firm of level of demand in any of these markets currently.

Michael Rehaut - J.P. Morgan

Okay, I appreciate it.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir, we’ll see in a couple of weeks.

Operator

Ladies and gentlemen, I would like to turn the call back over to Mr. Tomnitz for closing remark.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Thank for joining our Q2 conference call. We had lot of good points in our second quarter. One of the things we’d like to… several things we’d like to remind you of was we ended with a great cash position. We had nothing outstanding under our revolving credit facility. We believe we have the strongest balance sheet in the industry with the highest shareholders’ equity in the industry and no joint ventures. We look forward to returning to operational profitability in Q3 and Q4 and driving down our SG&A to a level of 10%, which we've historically run at. And most importantly, I want to thank all the D.R. Horton employees. We've done a great job. We have a great battle ahead of us. It's getting closer to the end of the battle. But we need to stick with it because as you know out there it's tough in the competitive environment and we appreciate all your dong for us. Thank you.

Operator

Ladies and gentlemen, this concludes today's D.R. Horton Incorporated, America's Builder, the largest homebuilder in the United States, second quarter 2008 conference Call. You may now disconnect.

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