Lennar (NYSE:LEN) became the first homebuilder to report earnings that include most of the calendar year fourth quarter for 2006 -- and it wasn't a pretty picture. By every metric, things were bad and getting worse. For an industry hoping for a soft landing, Lennar's numbers did not portend anything good.

While the company didn't provide the number of cancellations it experienced in the fourth quarter, one can infer it was not good, as it had to quadruple the value of the incentives offered to buyers. At the same time, it lowered the price of the houses to $302,000, a drop of more than 10% from last year.

In reality, home prices have been dropping all year long as Lennar struggled to maintain sales. Where homebuilders like Ryland (NYSE:RYL) tried to keep prices firm for most of the year, or offered slight discounts, and MDC Holdings (NYSE:MDC) was able to raise prices, Lennar was engaged in aggressively lowering its prices.

Average Selling Price (In Thousands)

2006

2005

Q1

$326

$292

Q2

$322

$293

Q3

$316

$306

Q4

$302

$338


So although it was able to claim -- at least up to the current quarter -- that its home prices were well above last year's prices, it was actually cutting them progressively throughout the year.

And while it may look like Lennar was able to increase the number of homes throughout the year, and even year-over-year (till this quarter again anyway), the third and fourth quarters tend to be strongest for homebuilders because of the seasonality of their business. More homes tend to close later in the year than earlier. You'll see the true picture of what to expect if you look at the decline in new orders. They have been falling year over year since the second quarter and really dropped off the table this time.

Home Deliveries

2006

2005

Q1

8,904

7,557

Q2

12,506

8,951

Q3

13,038

10,937

Q4

13,285

13,851


New Orders

2006

2005

Q1

9,793

9,460

Q2

11,757

12,095

Q3

11,056

11,614

Q4

9,606

10,236


Homebuilding is a cyclical industry and it's to be expected that after years of go-go growth we would finally experience a slowdown. While homebuyers can enjoy the slight respite from the spiraling price of houses, it's quite possible we're going to see tangential repercussions of this effect throughout the entire industry. With home values not rising as they had in the past, coupled with creative financing strategies that allowed homebuyers to get into these houses in the first place, it's likely there will be a wave of foreclosures that will further suppress housing prices and ripple out to the mortgage holders themselves.

Homebuilders are already writing down massive amounts of inventory to reflect the new pricing structure in place. Hovnanian (NYSE:HOV), for example, wrote down $355 million in inventory impairment charges in December, while Toll Brothers (NYSE:TOL) had $68.7 million in impairments and expects to record another $60 million in 2007.

Lennar is just the first shoe to drop this year for the builders:

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.