U.S. homebuilder D.R. Horton Inc reported a deeper-than-expected quarterly loss on Tuesday, as it navigates its way through the worst housing slump the nation has seen since the 1930s.

The company, which stands to lose its position as the largest U.S. builder due to the merger of two rivals, faces difficult market conditions as buyers snap up bargain-priced foreclosed homes. It has stepped up its focus on lower cost houses to compete.

Its shares, which on Monday touched the highest levels since May, fell 3 percent in early trading.

Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for home buyers and weak consumer confidence, Chairman Donald Horton said in a statement.

Shares of rivals Pulte Homes Inc
and Centex Corp , who are merging, also fell a day after they reported quarterly results.

No. 2 Pulte recorded a deeper-than-expected loss, while No. 3 Centex swung to a profit after a tax gain.

Pulte executives said demand was beginning to stabilize after several years of sharp declines. The bursting of the housing bubble set the stage for the current brutal U.S. recession.

We continue to experience market swings and shifts in industry conditions, but relative to the incredible volatility, the moves have been muted, Pulte Chief Operating Officer Steven Petruska said on a conference call on Tuesday. Business has been consistent for the past few months.

The Dow Jones U.S. home construction index <.DJUSHB> dropped 3.6 percent.

HORTON TAKES LOSS

Horton took a third fiscal quarter net loss of $142.3 million, or 45 cents per diluted share, a less-steep drop than the year earlier's $399.3 million net loss, which was a loss of $1.26 per share.

The results trailed analysts' average forecast of 23 cents per share, according to Reuters Estimates.

Revenue fell 36 percent to $914.1 million.

Fort Worth, Texas-based Horton has been writing down the value of the land it holds to build on as it and major rivals suffer through a downturn now in its third year. It took $110.8 million in charges to that effect during the quarter.

The company said it generated $124.1 million in cash during the quarter, raising its total unrestricted cash balance to $1.97 billion. Its cancellation rate stood at 26 percent in the quarter.

Its results were helped by having the right (low) price point and a more aggressive sales strategy, Credit Suisse analyst Daniel Oppenheim said in a note to clients.

Horton shares tumbled 39 cents to $11.36, Pulte fell 8 percent to $10.83 and Centex was down 6.5 percent at $10.58. All three trade on the New York Stock Exchange.

(Reporting by Scott Malone; Editing by Derek Caney and Maureen Bavdek)