In the latest cycle of public company earnings reports, market deterioration from bad to worse sets up a teachable moment for homebuilders – public and private – about what forces drive business dynamics as conditions deteriorate. While one year ago multiple buyers jockeyed with one another for every available property – it's mostly the opposite now. Now, multiple sellers jockey with one another for dibs to serve fewer and fewer buyers who remain undeterred by both higher interest rates, and almost certain knowledge that they could pay less for any property if they wait.

For insight into how publicly held homebuilders are shifting their pricing and incentives programs in real time to snap at opportunity and dodge greater risk, we've excerpted key question and answer segments from last week's series of earnings call transcripts. We zero in on both the game plan and the execution to date for trying to set and keep a price floor capable of moving both backlogs and new orders at tolerable absorption pace rates.

Here's a lift of key exchanges from investment research analysts questions and the responses of public homebuilding company strategic and financial officers. The verbatim responses spotlight the ranges, rationales, tactics, and expectations for price adjustments, from Century Communities, Tri Pointe Homes, Taylor Morrison, M/I Homes, PulteGroup, Meritage, and M.D.C. Holdings.

PulteGroup [Oct. 25, 2022]

Carl Reichardt , BTIG

Ryan, can you talk a little bit -- you mentioned October pricing and it's the -- in October, you saw some pricing and incentives in certain markets are starting to have some traction. Can you expand a little bit on that, sort of, where and what you're doing where you might be seeing at least a little bit of stabilization in absorptions?

Ryan Marshall, president & CEO, PulteGroup

Yeah, Carl. I appreciate the question this morning. As I mentioned in my prepared remarks, is we've worked through the changing market conditions over the last three to four months, early on our incentives were largely financing-related incentives, things that aimed at buying the rate down, extended rate locks, things of that nature.

We felt early on that we were getting traction with consumers, especially when you could provide interest rates that were sub-5%. And in some cases, we were able to even get sub-4% with the incentives. As rates have pushed up into the 7% range, we're finding those things to be less effective. And so we've really focused the majority of our energy on pricing to what we believe current market conditions are. So price roll-backs and price drops.

We have been strategic in those, Carl, but as I've talked about, we've worked to protect backlog as best we can, but we really feel it's important to continue to move inventory and to maintain the market share that we've worked so hard to get in the market. It's really those price rollbacks that we've seen get some traction over the last two to three weeks. And so we do feel while it's tough, we are encouraged with the activity that we're seeing.

Century Communities [Oct. 26, 2022]

Doug Wardlaw, JP Morgan

In terms of different strategies with incentives from community to community, what are you seeing there? And moving forward, obviously, you're going to adapt as an environment changes, but where do you see incentives moving for the rest of the year and maybe moving into 2023?

David Messenger, Century Communities, Chief Financial Officer

Well, as we said in our prepared remarks, our focus is on selling our complete and completing homes as they move through the construction cycle. Generally, the closer to completion, the home is, the larger incentive that will be on that house to encourage those homes to sell first. When we look at the incentives and price concessions we're currently seeing, obviously differs a bit by sub-division and by market, but overall, they're averaging between 5% and 10% on current sales.

Alex Barron, Housing Research Center

I wanted to just focus a little bit around the comments about discounting the houses, I guess trying to find the market clearing price. I'm just trying to get a sense of how willing I guess you are to do that. In other words, if there's a big disconnect between where you were with price and where, you know, a potential buyer can afford a home, how are you thinking about that decision making process of finding that out? You know, is it just a matter of what the rest of the competition is doing or, you know, how are you guys thinking about that?

David Messenger

Well, it really comes down to regardless of the market, whether the market is strong or not as strong. It comes down to the individual subdivision level. And so, when we look at it, there's a lot of factors that go in. As you mentioned, competition is one. Another one is, how many homes that we have in the subdivision and what the timing of their completions are. Where we sit with our backlog. And if we have a lot of backlog, then we're going to be more hesitant to do anything on new sales that would impact our backlog or appraisals in that community.

So, it's really – it is truly down to a case by case basis as we make those decisions, but in general, I think our philosophy is that if a home is completing, then we'd like it off our books. And we're going to look at each individual situation and do what makes the most sense in that particular home and that particular community.

Taylor Morrison [Oct. 26, 2022]

Carl Reichardt, BTIG

I wanted to ask a little bit about base price cuts, Sheryl. Are you going into your backlog on BTO product where you're cutting bases and giving them new price? Or how are you managing your backlog where you've got long dated communities BTO product that's going to take a while to get out the door, especially given the supply constraints you're seeing?

Sheryl Palmer, Taylor Morrison Homes, President & CEO

Good morning, Carl. Thanks, good question. Did not one answer that will span the entire portfolio, I think as we discussed last quarter, we took very early action to proactively reach out to our backlog. We had to make decisions community by community, as you can imagine, given time and backlog, the competitive environment, the deposits that we held, we looked at it all differently. Generally, I would say what we did with backlog, I'd say the 95% rule would be that we assisted them with financial incentives to help them lock a loan that mitigated the change they've seen in the interest rate from when they had gone into contract.

When I look across the quarter, we spend somewhere around 15 basis points or 16 basis points across the entire portfolio of Q3 closings to protect backlog. It was generally around 2% of loan amount, maybe just over 1.5% of sales price. The deals that actually affected the backlog, but as I said, very strategic and how we approached them. I think if I look at the quarter and the ones that actually impacted the quarter was about 8%, as we look at all the characteristics of timing, pricing, deposits, all those things.

Elizabeth Langan, Barclays

Thank you for taking the questions. Just to kind of start off, how should we be thinking about incentives going forward? And what do you think the magnitude could be that they could reach? And how does that kind of balance with potential price cut and kind of finding that equilibrium that spurs demand?

Sheryl Palmer, Chairman and CEO

It's a good question. There's a lot to unpack in there as you might expect. When we think about incentives, as we've talked about for the last couple of quarters, our priority is really about understanding what the consumer needs. And I think this is the time honestly for our industry to really kind of come together and say what's the common sense on how you really approach an environment like this, because it's unsettling for everyone. And how do we use the tools that are in the best interest of the individual consumer.

Our teams have really had to get into the trenches to understand what will help each individual consumer, because you can't just blindly reduce prices. I think the more you just reduce prices, the more the consumer expects us to do. So we're -- this is a time where we're really going to sell value, leverage the tools. With that, we will continue to prioritize finance as a sales tool, because as a sales tool, as we've talked in the past, the two greatest needs our customers have, I think, the average consumer has is help on monthly payment and help with cash to close. By using finance as a sales tool, it allows us to work two times to three times in cost as it would if we just reduce sales prices.

Having said that, as we see pricing pressures with inventory building in our market we have to respond in like, so I think it's a combination. As I said in my prepared remarks, when I -- prepared remarks is when I look at the impact of using finance as a sales tool potentially incentives on home of the week or option special deals, as well as any adjustments to base pricing. At this point, we think that somewhere in the mid to high single-digits. That will move community-by-community in many communities it’s taken a little bit more and many it's taken less, but we're moving to find the traction that we need to generate pace in each of our communities.

M/I Homes [Oct. 26, 2022]

Jesse Lederman, Zelman & Associates

I’m just curious, what would you estimate your net pricing is down sequentially when factoring in both base price reductions and incentives? And if you could give a little color on, which markets or which communities you are seeing incentives not needed and which you are seeing the most. Because I know Bob, you mentioned earlier in your prepared remarks that it really is on a community by community basis.

Bob Schottenstein, M/I Homes, President & CEO

Yes, that’s a great question and a really hard one to answer. As you know, we don’t give – I know, we don’t give guidance, because you point that out in every one of your releases. And so I’ll – but I’ll try to be really responsive to what is really a good question. I think of the markets that we’re in; Austin is clearly the one that’s under the most pressure if you will, in terms of having gone through incredibly rapid rise in prices and runaway margins, not just for us, but for all the builders. And now we’re beginning to see inventories rise there, and that markets a tougher nut to crack right now.

What we will do there is going to be different than what we might do in Dallas is an example, which seems to be holding up considerably better. There are so many factors that influence our pricing strategy. How much land do we own in that community? Are we buying lots on a finish take down? Is there a competitor right next door that is sitting on too much land and is doing some deep discounting because they believe that’s in their best interest point.

Pricing look, I don’t know that we’re any smarter than else, but I’m going to be really blunt with you. Pricing is all art and very little science. And if it was easy, the average builder’s sales wouldn’t be down 20% to 50%. We would’ve dealt with it sooner. It’s very, very difficult to know exactly where to price to meet demand. We know that prices are going to come down and we know margins are going to come down. Are they going to come down 200 basis points, 300 basis points, 400 basis points more than that?

I don’t know. I don’t think so, but I think they’re going to settle somewhere company- wide for us in that 22% or so range. That’s not guidance, but that’s just intuition. I’m just trying to be realistic about what we see. How much land a builder owns company-wide. Some builders own a four year to five year supply. We barely own a three-year supply. Some builders have some callable debt, we have zero. Our hair’s not on fire. That doesn’t mean we’re sitting on our hands, but we’re trying to be prudent. We’re trying to protect the backlog. I think job one for us and most of our competitors is to get that high margin backlog closed without disrupting it too much.

And I think so far we’ve been very successful and being able to do that. But clearly we’ve –most of the incentivizing that we have done up until recently has been with buying down mortgage rates on specs and other homes that can close within 30 days, 60 days or 90 days that work quite well in August, not quite as well in September. And now, we hope to be able to incentivize exclusively by doing just that without impacting base prices or messing around too much with competitive appraisals.

Now, we’re having to go to price reductions in new communities. We’ve got some new communities coming on; you can open up fresh at a new price and not in any way disrupt the backlog. And having said all that, I can tell you that there are communities within a certain division where we’re maintaining our pricing and it’s at premium margins. We may not sell for a month, but we’re still selling two or two and a half and that’s, and that still meets underwriting and yet in the same city there may be others where we’re having to discount, to well below 20%.

But the averaging is I think is going to come close to what I’ve said. We’ll know if I’m right next a year from now, but I’m just trying to be very frank with you. Your question, I think is the biggest question a lot of investors have. Maybe next to how much write- off/impairments will the builders have and that is where will the margin settle in? What was, a 25% or so, 28% business, will it be a 22%, a 24% or an 18% business? And we just don’t know that yet.

Jesse Lederman

Yes, I really appreciate all the color, you were able to provide there. Just a quick follow up on one point, I know you said that there were some, on newer communities without having a risk backlog; you can lower prices without it being a price cut necessarily. So, if you were to compare the new price on those communities that are opening up to an existing community that may be in a similar area, how far below that existing community are those homes pricing?

Phil Creek, M/I Homes, Chief Financial Officer

Well, one thing interesting in it, I guess it did surprise us a little bit; the closing price in the third quarter was $487,000. And if you look at the average sale price on new contracts in the third quarter was $518,000. And again, we’re opening a fair amount of stores and buying large, as Bob said, our new stores are actually performing pretty well. During the third quarter, we opened 25 new stores. So, I mean you got to kind of some come down somewhere. I mean, are we kind of expecting, again not guidance ASPs to come down the next, year or so? The answer yet probably will.

We’re trying to stay as affordable as we can, but obviously land prices have gone up, the last couple years. But it is just so much a subdivision business. I mean, it’s one issue opening a new store, its one issue if you’ve got a subdivision with the fair amount of backlog, it’s another issue if we’re on the tail end with five or 10 lots left, we’ll probably get pretty aggressive to move through that. So, every community is just a little bit different right now, but we’re paying very close attention to all of them.

Bob Schottenstein

The other factor, and there’s just so many things, but we had this come up yesterday as we’re reevaluating as I hope I made clear in my remarks every land deal. Almost in the same way that we did, during the two week to three week period following the March of 2020 pandemic where every single land deal in our company, went into a pause reset mode. Luckily, we didn’t have to do too much other than spend the time figuring out what we might do if the sky fell.
But now we’re back in that same mode and reevaluating everything. And just yesterday we were looking at a deal where we intended to put a certain higher price line of homes in a particular community and in looking at how we might renegotiate or handle that deal, the question is should we try to put our more affordable smart series in that community instead because on average our Smart Series houses sell for about a $100,000 less than our more premium line.

And so things like that also create a lot of muddled comparisons. You’re trying to compare apples-to-apples and make, just get a different variety of apple and but if a builder with an average price around $500,000, my guess is somewhere between 20 grand and 50 grand in price reductions are going to take place. I think with margin reduction over the next 12-months. I think that’s what you’re starting to see and hear, from just some of the things that are happening in the field.

Meritage Homes [Oct. 26, 2022]

Truman Patterson, Wolfe Research

Could you give third quarter incentive levels, including base pricing adjustments for orders? And then also, I’m hoping you could just go across your markets and discuss which regions or states you’re seeing the highest level of incentives and potentially quantify those? I’m really thinking about the Western markets in particular.

Phillippe Lord, CEO Meritage

So, the first question was what have we done with incentives and pricing. We don’t really look at those things differently by the way. We’re a spec builder. So at the end of the day, we’re just looking at the net price and what we’ve rolled the net price back, whether it came in the form of incentive or came in the form of price rollback.

But I’d say anywhere from 50 -- high mid-teens and some of the more challenged communities to something really, really quite normal as you move East, just sort of on the margin. So if you look at the Western markets, again, community by community because we have some communities where we really haven’t had to do anything in other communities where we had to do more meaningful, we may have rolled back net pricing high teens.

As you work your way to taxes with the exception of Houston and Austin, it’s been more high single digits, 10%. And then Austin and Houston, maybe back into those high teens, especially Houston, where we’ve had to roll back pricing to really compete with the competition and then as you roll East, things have been relatively normal.

Sometimes just kind of normal incentives to move things, normal adjustments in pricing to move things. And we really haven’t seen a need to do much more than that.

M.D.C. Holdings [Oct. 27, 2022]

Truman Patterson, Wolfe Research

Bob, I heard you give commentary earlier about the level of incentives in your closings. I'm hoping you could just give where third quarter order incentives or base price cuts kind of combined might have been for the third quarter, and what kind of the exit rate was in September, October time period?

Bob Martin, M.D.C., Chief Financial Officer

So as far as incentives go, I think for sales for the quarter overall, we were about 7%, but I think they were trending up towards 8% as we got to the end. Of the quarter as we looked at base price decreases, hang with me for one second, so I can get you a more exact number. Derek, what page was that?

Derek Kimmerle, M.D.C., VP-corporate controller

Base price decreases are pretty small relative range...

Bob Martin

It was, I think 1% or 2% overall kind of a relatively de minimis number relative to the incentives, but I can get that exact...

Tri Pointe Homes [Oct. 27, 2022]

Stephen Kim, Evercore

I was wondering if you could tell us a little bit more about your incentives. I think, Glenn, you mentioned you're running at around 5% right now. I assume that's not including base price reductions, wanted to get a sense of is that true? And if so, how much base price reductions just, taking an estimate, providing an estimate, how much that might be year-over-year? And then also, are you finding the need to offer what you might call late-stage incentives, as folks come to the closing table?

Glenn Keeler, Tri Pointe, CFO, Chief Accounting Officer

Hey, Stephen, good question. This is Glenn. So, so far base -- true base price discounts have been pretty minimal, we've barely been focusing on incentives and that's that average of 5% that we're talking about. There's been a few select communities where we've taken base price discounts or reduced base price, but it's pretty small in the overall picture. And then for the late-stage incentives, Linda, did you want to add some color there?

Linda Mamet, Chief Marketing Officer

Certainly we really work closely with customers as they are approaching their closing to ensure that they're comfortable and ready to move forward and close on the schedule date. So we do typically see more of the renegotiation or assistance, additional financing incentives coming in at the late stage. Other incentives are, of course, on upfront at the time of the purchase with things like forward commitments.

Stephen Kim, Evercore

And those late-stage incentives to provide a little bit more detail around that. Are you saying that those would be things like buy downs or things of that nature? Is there anything different about those late-stage incentives that we should know about? And then you also talked about specs. I just wanted to get a sense for how many specs per community in general would you say you target? And how far above that targeted range do you think you might run in the near-term?

Linda Mamet

On those late-stage incentives, it might be, Stephen, an example where we gave closing cost incentives at the time of contracts and we're giving some additional incentive before close to further by a rate down if the customer didn't already have a long-term lock in place. Or it might be in the form of a design studio credits as there might have been additional changes in the market from when they originally purchased.

Doug Bauer, CEO

Yes, relative to spec, Stephen, we consistently implement strategies. And as we said in the prepared remarks, about 60% of our starts -- our spec starts, that's largely to fuel the desire from the consumer to have certainty around close and we're seeing in today's environment they really are looking for a close date within 30 to 90 days and so that spec strategy works really well for us. On average our target is about five specs per community.