Question-and-Answer Session
Operator
(Operator Instructions) We’ll take our first question from David Goldberg with UBS.
David Goldberg - UBS
The first question is really about the gross margin and the gross margin trend. Domenico, you commented that gross margins are going to be compressed for the rest of ’08. I guess the question is as you look forward to the land position and the cost basis on the land position, when do you see those pressures abating a little bit and where do you think, assuming prices were to stay stable, where do you think margins can get to as we look out a little bit further?
Domenico Cecere
Well, David, the big question is what’s going to happen to resale prices over the next several quarters and that’s the factor that is very difficult to predict. I mean, there was a significant decline in the last couple of months and the [inventory has yet to crack], so if I had a crystal ball that could be able to forecast what happens to resale prices, I could have a better understanding of what would happen to our margins.
David Goldberg - UBS
Maybe the better way to ask the question is how much lower is the cost basis, maybe percentage wise, on land out in the future versus land that you are delivering on now?
Domenico Cecere
Well, I mean I think as we reload, you know, and since we have a lean land position, as we reload new lots, we’re reloading those lots with margins closer to our normal levels, which would be closer to 20%. But with the existing lots that we have today, there’s still not a lot of margin in those lots.
David Goldberg - UBS
And if I could just get a follow-up; Jeff, you were talking about price protection and rate locks, and I was just wondering how extensive the use of those were, if we had like an idea how you are thinking about it, especially if we think there’s going to be some price declines moving forward, how you are thinking about what the potential liability that creates for you guys.
Jeffrey T. Mezger
Well, the liability is only to that home under construction for that period of time, Dave. We rolled the program out in January. It’s been well-received by the consumer. Frankly, if you have a home in backlog with an approved loan and a buyer is ready to close and markets erode around you, you have to react to that anyways. And all we commit to is if we were to lower the prices of our homes in that community while their home is under construction, we’ll give them the lower price. It has nothing to do with what a competitor does across the street or a resale down the street.
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