Smith Douglas Homes continued to grow orders and closings during the third quarter despite mounting affordability pressure. The challenging housing environment weighed heavily on the builder’s profitability.
The No. 33 builder closed 831 homes during the quarter, up 5% from 788 a year earlier. However, home closing revenue increased just 0.2% to $262.5 million as the average sales price of homes closed fell to approximately $316,000 from $333,000 in the prior-year period.
Net new home orders increased 13% to 777 from 690 a year earlier. The contract value of those orders rose to $246.1 million from $231.8 million, while the average sales price of orders declined to approximately $317,000 from $336,000. The quarterly cancellation rate was relatively stable at 11.3%, compared with 11.2% a year earlier.
Backlog increased 25% year over year to 947 homes at the end of September, with a contract value of $305.3 million.
“We continued to execute with discipline during the third quarter despite increasingly challenging housing market conditions,” said CEO and vice chairman Greg Bennett. “Higher mortgage rates and affordability pressures have weighed on buyer demand and profitability, but our teams remain focused on things we can control with respect to managing costs, building efficiently, and maintaining a steady absorption pace.”
While Smith Douglas Homes maintained its sales pace, profitability came under considerably more pressure. Home closing gross margin declined to 16.3% from 21% in the prior-year quarter. Pretax income fell to $3.3 million from $17.2 million, while diluted earnings per share declined to $0.07 from $0.24.
The builder’s lower average selling price highlights the affordability dynamic. The average price of homes closed decreased roughly 5% year over year to $316,000, while the average price of new orders declined about 6% to $317,000.
“While we expect market conditions to remain challenging in the near term, we remain confident in the long-term demand for affordable housing,” Bennett said. “Our priorities continue to be running an efficient home building operation and preserving our financial strength while remaining prepared to take advantage of opportunities as conditions improve.”
Smith Douglas Homes also continued expanding its community footprint during the quarter. The builder ended September with 113 active communities, up 15% from 98 a year earlier. Total controlled lots increased 2% to 24,724, including 22,693 optioned lots.
The company ended the quarter with 1,514 homes under construction, compared to 1,098 last year.
“Our disciplined approach to capital allocation and land investment remains particularly important in today’s operating environment,” said executive vice president and CFO Russ Devendorf. “Our land-light operating model, efficient construction cycle times, and conservative balance sheet provide us with the flexibility to manage through periods of weaker demand without compromising our long-term objectives.”
