Favorable market conditions, underscored by low existing-home supply and a resilient economy, resulted in healthy traffic trends and “strong” financial results for M.D.C. Holdings in the second quarter. The 11th-ranked home builder on the 2023 BUILDER 100 list achieved home sale revenues of $1.1 billion and profit per share of $1.24, both well above expectations from market analysts.

“Buyers have adjusted to the higher mortgage rate environment, and they have come to realize that the new-home market provides much more in the way of quality construction, customization, and functionality as compared to the existing-home market,” Larry Mizel, executive chairman at M.D.C. Holdings, said during the builder’s quarterly earnings call. “The consistently strong traffic patterns during the quarter allowed us to scale back on many of the incentives we implemented earlier in the year, and we have begun to raise prices in communities where demand has been the strongest.”

Net new orders increased on both a sequential and a year-over-year basis in the second quarter to 2,167 homes, in large part to a sales pace of 3.1 homes per community per month. Unit gross orders in the quarter increased 21% year over year to 2,717 homes, and cancellations as a percentage of gross orders declined to 20.2% from 37.2% in the prior-year period. M.D.C. Holdings delivered 2,009 homes in the quarter at an average selling price of $549,000, down from 2,536 deliveries in the second quarter of 2022 at an average selling price of $572,000.

“The new-home market continues to benefit from a lack of existing-home supply, which has created a real opportunity for home builders to make market share and has helped to stabilize pricing,” M.D.C. Holdings president and CEO David Mandarich said. “We believe this dynamic can continue as long as rates stay at these higher levels and existing homeowners opt to stay in their current homes. M.D.C. is well-positioned to take advantage of these conditions thanks to our focus on affordability and our strong presence in some of the best housing markets in the country.”

Shift To Spec Homes

Approximately two-thirds of closings in the second quarter for M.D.C. Holdings were spec homes, with the home builder ending the quarter with 2,155 spec homes under construction, a significant increase from 653 spec homes in the second quarter of 2022.

“This increased level of spec inventory is part of a broader strategy switch from our company in response to changes we’ve seen in the marketplace,” Mandarich said. “Most buyers today want a shorter time between sale and move-in than associated with a build-to-order home. These buyers are also willing to forgo some personalization to get in their home quicker.”

He added the shorter sale-to-close time reduces cancellation rates and helps with overall inventory turn. The builder is not moving away from the build-to-order model, though, and aims to have a mix of spec and build-to-order homes available within its communities. Spec homes will feature the home builder’s more popular amenities, options, and upgrades curated by its professional design team.

“We believe that this shift will allow us to deliver homes in a more timely manner to our customers while still getting the gross margin benefits typically associated with our home gallery offerings,” Mandarich explained. “Overall, we feel good about the new-home market and our company’s positioning heading into the back half of the year.”

Cycle Time Improvement

Mizel said for the first time in over two years, M.D.C. Holdings achieved sequential improvement in the average construction build time for homes closed in the second quarter.

“Supply chain conditions and material availability have improved considerably since the pandemic, as we are now projecting a construction build time of under 180 days on homes that we are starting today,” Mizel said. “The improvement in building conditions, coupled with our increased emphasis on spec inventory, should result in better inventory turns and improved capital efficiency for our company.”

Land Update

M.D.C. Holdings became more active in the land market in the second quarter, approving the purchase of over 1,300 lots. The home builder ended the quarter with 22,309 lots owned or optioned, of which over 83% were owned.

“While the land market remains competitive, we believe that our size, scale, and access to capital provides us with a significant edge over smaller private builders who rely on project financing from local lenders,” Mizel said.