The market conditions that contributed to a strong first half of the year persisted for public builders during the third quarter. A majority of public builders once again outperformed analyst projections, buoyed by persistent demand, the lock-in effect, limited resale inventory, and the ability to offer mortgage-related incentives.
During earnings calls, public builders did note the return of seasonality in the market and the expected decline in traffic as summer turned to fall. With the return of seasonality, many builders highlighted incentives and suggested incentive offerings would likely increase in the final months of 2023 to help rate-sensitive buyers achieve better affordability.
While market uncertainty and continued elevated rates are providing headwinds, cycle time improvements across the board for public builders remain a positive tailwind and are aiding the companies to turn inventory more quickly. Several builders highlighted that their goals of returning to pre-pandemic cycle times may be reached in fiscal year 2024.
Despite reports suggesting builder confidence is declining, executives at public firms maintained largely positive outlooks for the housing sector during the third quarter. Public builders shared some forward-looking commentary during the most recent earnings cycle:
“To adjust to changing market conditions and higher mortgage rates, we have increased our use of incentives and are reducing the size of our home where possible to provide better affordability for our home buyers. We expect to continue utilizing a higher level of incentives in fiscal 2024, particularly rate buydowns in the current interest rate environment. Our sales volumes can be significantly affected by changes in mortgage rates and other economic factors. However, we will continue to start homes and maintain sufficient inventory to meet sales demand and aggregate market share.” —Michael Murray, executive vice president and chief operating officer, D.R. Horton
“The Lennar team has remained focused on balancing and maintaining production and sales pace, reducing cycle time, increasing cash flow, improving inventory turn, and driving [a] strong bottom line. … We’ve continued to remain production- and volume-focused. At the same time, we maintain a carefully matched sales pace using our digital marketing and dynamic pricing machine to keep production pace and sales pace ‘rematched.’” —Stuart Miller, executive chairman, Lennar
“In the quarter, I would highlight our active-adult business as an important contributor to our sign-up growth and our gross margin performance. In an operating environment where rising mortgage rates are creating increasing affordability challenges, 47% of our Del Webb purchasers were cash buyers. This is up from 33% just two years ago. … We have transitioned our first-time buyer communities to a spec build model to better serve these customers. Spec building allows us to maintain a more consistent cadence of starts in those communities, which drives construction efficiencies and is important in working with our trades.” —Ryan Marshall, president and CEO, PulteGroup
“We focused on pace by offering financial incentives and achieved an average absorption pace just above our internal goal. We believe housing market demand will remain steady in the near future. Although it was the turn of normal seasonality and some near-term volatility from interest rates, we will continue adjusting our suite of financing incentives in order to maintain our sales pace target. With higher order volumes, we gain the operational efficiencies and improve leverage of fixed costs to drive better financial results. … With normalizing cycle times, we can deliver homes faster and turn our inventory three times a year.” —Phillippe Lord, CEO, Meritage Homes
“We believe we are well positioned to navigate any possible shift in demand should rates go higher or if the economy softens, and we are prepared to take the steps necessary to adjust to changing conditions as we have done in past cycles. The flexibility inherent in our Built to Order approach with buyers selecting their lot, floor plan, and finishes in our design studios is a meaningful differentiator as buyers are empowered to significantly influence our overall sales price based on their choices. Approximately 70% of our communities offer plans with square footage below 1,600, smaller homes that feature similar room counts and livability that are a more affordable option.” —Jeff Mezger, president and CEO, KB Home
“The third quarter was healthy despite the headwinds from last year’s slower activity and the interest rate pressure that unfolded during the quarter. As we head into year-end, there are many factors at play complicating what is always a high volume push for the industry to deliver homes to customers and ready inventory for the spring selling season. The sharp spike in interest rates over the last two months has once again pushed affordability to unsustainable levels for many buyers. … While the near-term outlook is somewhat cloudy, the intermediate- to longer-term opportunity for housing and Taylor Morrison remains clear.” —Sheryl Palmer, chairman and CEO, Taylor Morrison
“We’re encouraged by the improvement that we have seen over the past several quarters in our deliveries and gross margins, which are benefiting from reduced levels of incentives, improved cycle times, and lower direct costs. We expect our fourth quarter deliveries to increase over third quarter levels. The sequential improvement in our margins and deliveries this year, coupled with the increase in our community counts, position us well for 2024.” —Dale Francescon, co-CEO, Century Communities
“While rising rates remain a challenge for the overall industry, they further cement the lock-in effect that has kept resale inventory at historically low levels. This has become a tailwind for home builders and especially the larger well-capitalized builders who build at lower costs and are better positioned to take advantage of spec building and buying down mortgage rates. … Demographic and migration trends continue to provide long-term support for the industry, with millennials forming families and buying their first home later in life when they have higher incomes and accumulated wealth.” —Douglas Yearley, CEO, Toll Brothers
“Our current backlog and inventory of curated spec homes put us in position for a strong end to 2023 and provide us the opportunity for year-over-year increases in home sale revenues and pre-tax income to start 2024. The most recent increases in mortgage rates will likely remain a headwind in the near term, [but] our ability to buy down a home buyer’s mortgage interest rate and offering closing cost assistance remain very effective incentives to address affordability concerns.” —Bob Martin, senior vice president and chief financial officer, M.D.C. Holdings
“We are in the best financial condition in our history. We remain on track and are very excited to open a number of new communities yet this year, thus increasing our community count by approximately 15% from last year. We feel very good about our business and are well positioned to have another year of strong results in 2023.” —Robert Schottenstein, president and CEO, M/I Homes
“Our performance in a difficult interest rate environment reflects our ability to generate sales and successfully deliver on our growth strategy. We continue to focus on managing construction times and increasing inventory turnover. … Although uncertainty remains for the remainder of 2023 and beyond, we have set ourselves up for another successful year and have increased guidance to approximately 6,750 closings for the fiscal year.” —Patrick Zalupski, chairman and CEO, Dream Finders Homes
“Demand remains healthy, supported by positive longer-term fundamentals including strong demographic trends and a low supply of affordable homes. We believe that once the Fed’s targets are met and we have a clearer view of the economic landscape, interest rate volatility will subside and the market will likely exhibit more stability similar to what we experienced in the years prior to the pandemic. However, there’s no consensus on whether that takes a couple of quarters or a couple of years. Therefore, we are laser-focused on ensuring that any near-term decisions around pricing, incentives, investments, and community openings are weighed not only in the context of their impact to our company’s near-term success, but also five, 10, and 20 years down the road.” —Eric Lipar, chairman and CEO, LGI Homes
“We’re optimistic about our future growth prospects. Furthermore, we believe that favorable demographics, persistently low supply of existing homes, and a positive employment trend will support demand over the long term.” — Ara Hovnanian, president and CEO, Hovnanian Homes
“Throughout 2023, our strategy to increase construction starts, combined with improved cycle times, has significantly bolstered our inventory of spec homes. … Under the current market backdrop, having availability of quick move-in homes has allowed us to ramp up our delivery potential and to capture share in today’s undersupplied housing market in a higher interest rate environment.” — Doug Bauer, CEO, Tri Pointe Homes
“We remain confident in the multiyear outlook for our company and industry. Powerful demographic trends and a persistent undersupply of homes should continue to provide support for new-home sales. With a dedicated operating team, a growing community count, and a more efficient and less leveraged balance sheet, we have the resources to create durable value for our stakeholders in the years ahead.” —Allan Merrill, CEO, Beazer Homes
“I do believe we’re in a different dynamic than we were a year ago. Despite higher mortgage rates, buyers have been adjusting to the more challenging rate environment as we have seen more than twice as many cash deals year over year, but consistently strong FICO scores. … Because of our industry-leading gross margins, we will have more flexibility in adjusting home prices as needed. With our operational efficiency and strong understanding of our local markets, we have the ability to modify square footage, floor plans, and options to help address affordability issues and buyers’ needs.” —Jim Brickman, co-founder and CEO, Green Brick Partners
“Overall, we feel really good about our business as we head into the end of the year, despite the high mortgage rate environment. We continue to see motivated buyers in our markets, while existing home supply remains at an all-time low. Housing fundamentals have remained positive in our existing markets, and we are excited about the opportunities that lie ahead for our new division in Colorado. Cost inflation appears to be waning, and labor and material availability are the best we have seen in years. As a result, we believe the outlook for our company remains bright.” —Mike Forsum, president and chief operating officer, Landsea Homes
“Despite recent volatility in rates, we still believe there are attractive opportunities for home builders due to a massive supply shortage in the home market, and we are excited about what the future holds for our company.” —Michael Nieri, president and CEO, United Homes Group
