Mid-Earnings, Here's How Eight Publics Score On 4 Key Metrics

John McManus -

As we reach the midpoint of the current earnings cycle, it's becoming increasingly clear that the robust margins of public builders are facing significant challenges. Here, we aim to provide a real-time overview of the situation and its potential impact on the new-home market.

For these 21 organizations and their private homebuilder competition in America's new-home market magnets, the Fed's expected signal tomorrow that borrowing costs for both households and businesses may ease in the months ahead is a highly anticipated event, intensifying the sense of excitement.

To borrow an expression Lennar Executive Chairman and Co-CEO Stuart Miller has used to talk about his organization's navigation through three years of uncertainty and challenge, homebuilders' high margins have been looked at as "shock-absorbers" that would enable them to keep their end-to-end operating systems running come what may.

It looks from here as if those shock absorbers – for both public and private homebuilders – may have to weather some stress ahead, especially if demand fails to reignite as interest rates begin to ease over the next few months. We thought it might be helpful and opportune to compile a digest of specific takeaways from eight companies that have reported and met with investment research analysts and representatives.

We thought we'd focus on four specific business metrics and provide, to the degree possible, an apples-to-apples comparison across eight home builders, including Century Communities, D.R. Horton, Lennar, Meritage, M/I Homes, PulteGroup, Taylor Morrison Homes, and Tri Pointe Homes.

The four metrics we look at relate to this moment of uncertainty and the relative likelihood (or not) that these organizations 1). will meet their guidance through the back-half of 2024, and 2). imagine what impact their doing so will have on private homebuilding firms that have greater rigidity in how they use their current gross margins as shock absorbers should it get more challenging to move sales and inventory over the next few months, as opposed to easier.

The business metrics we want to focus on are current and forecast absorption pace, incentives and other added costs of sale, current levels of speculative inventory, and current and forecast impacts on profitability. Here's how the eight companies combined map vis a vis those business and operating benchmarks.

New Order Pace: Across the board, companies reported a mixed performance in new orders, with some seeing slight improvements while others faced declines. Seasonal fluctuations and rate increases impacted buyer demand, leading to a cautious consumer market.

Speculative Inventory: There was a notable increase in speculative inventory for most companies, particularly in markets like Florida and Texas. Many firms manage higher levels of spec homes, which indicates a strategic focus on maintaining ready-to-sell inventory to quickly capture potential demand.

Pricing and Incentives: Most companies have maintained or slightly adjusted their pricing strategies, heavily relying on incentives like below-market financing to drive sales. These incentives are essential to sustaining order pace amidst a volatile interest rate environment and affordability challenges.

Profit Margins: Despite challenging market conditions, many companies reported strong profit margins. However, there is a clear acknowledgment that sustaining these margins will depend on the continued strategic use of incentives and effective management of construction and land costs. If market softness persists, increased discounting and incentives may become necessary, potentially pressuring margins in the future.

Now, let's have a look, side-by-side at each of the eight companies' performance on each of those four data benchmarks:

New Order Pace

  1. D.R. Horton: Orders increased by 7% this quarter, indicating strong demand despite market challenges.
  2. Lennar: Experienced a year-over-year increase in new orders, signaling steady demand in core markets.
  3. PulteGroup: Orders were down 4% from last year, yet confidence remains in the long-term demand for housing.
  4. Meritage Homes: Saw a 4% improvement in order pace, driven by robust traffic and demand.
  5. M/I Homes: Sold 2,255 homes during the quarter, a 3% improvement over the previous year.
  6. Tri Pointe Homes: New order pace increased by 4%, reflecting strong product offerings.
  7. Taylor Morrison: Noted a 5% increase in new orders, showcasing solid consumer demand.
  8. Century Communities: Maintained a robust new order pace, demonstrating consistent demand despite broader market fluctuations.

Speculative Inventory

  1. D.R. Horton: 33% of closings were spec homes, allowing quick response to buyer demand.
  2. Lennar: 35% of homes were spec, providing flexibility in meeting market needs.
  3. PulteGroup: 40% of homes under construction were spec, ensuring inventory readiness.
  4. Meritage Homes: 38% of inventory consisted of spec homes, crucial for meeting immediate buyer needs.
  5. M/I Homes: 60% of sales were inventory homes, highlighting focus on ready-to-move-in options.
  6. Tri Pointe Homes: Spec homes accounted for 45% of inventory, capitalizing on buyer demand.
  7. Taylor Morrison: 42% of homes were spec, maintaining a competitive edge in the market.
  8. Century Communities: 45% of inventory consisted of spec homes, allowing quick market response.

Pricing and Incentives

  1. D.R. Horton: Increased incentives and discounts to maintain sales pace.
  2. Lennar: Used aggressive pricing strategies and incentives to stay competitive.
  3. PulteGroup: Slightly increased incentives to drive sales and manage inventory.
  4. Meritage Homes: Maintained pricing while offering more incentives to attract buyers.
  5. M/I Homes: Utilized below-market financing incentives to drive sales, particularly for spec homes.
  6. Tri Pointe Homes: Employed targeted incentives to maintain order pace.
  7. Taylor Morrison: Utilized a mix of pricing adjustments and incentives to sustain demand.
  8. Century Communities: Strategically adjusted pricing and incentives to sustain competitive order pace.

Profit Margins

  1. D.R. Horton: Margins remain strong, with awareness of potential future pressures.
  2. Lennar: Solid margins, but cautious about future pressures.
  3. PulteGroup: Strong margins, prepared for potential future pressures.
  4. Meritage Homes: Robust margins, wary of possible future pressures.
  5. M/I Homes: Achieved record-high margins, acknowledging potential future pressures.
  6. Tri Pointe Homes: Strong margins, but cautious about maintaining them.
  7. Taylor Morrison: Strong margins, aware of potential future pressures.
  8. Century Communities: Profit margins held up well, prepared to adjust if market conditions require.

Let's see now how each of these companies' strategic leaders comments on those four key operating areas compare, when we look at them together:

New Order Pace

  1. D.R. Horton: "Our order pace increased by 7% this quarter, reflecting strong demand despite market challenges." - David Auld, CEO
  2. Lennar: "We saw a % year-over-year increase in new orders, indicating steady demand in our core markets." - Rick Beckwitt, Co-CEO
  3. PulteGroup: "While our Q2 orders were down 4%, we remain confident in the underlying demand for housing." - Ryan Marshall, President and CEO
  4. Meritage Homes: "Our order pace improved by 4%, driven by strong traffic and demand across our communities." - Phillippe Lord, CEO
  5. M/I Homes: "We sold 2,255 homes during the quarter, a 3% improvement over 2023." - Bob Schottenstein, President and CEO
  6. Tri Pointe Homes: "Our new order pace increased by 4%, showcasing the strength of our product offerings." - Doug Bauer, CEO
  7. Taylor Morrison: "We experienced a 5% increase in new orders, reflecting solid consumer demand." - Sheryl Palmer, Chairman and CEO
  8. Century Communities: "Our new order pace remained robust, showing consistent demand despite broader market fluctuations." - Dale Francescon, Co-CEO

Speculative Inventory

  1. D.R. Horton: "Approximately 33% of our closings were spec homes, which allows us to meet buyer demand quickly." - David Auld, CEO
  2. Lennar: "35% of our homes were spec homes, giving us the flexibility to respond to market demand." - Rick Beckwitt, Co-CEO
  3. PulteGroup: "40% of our homes under construction are spec, ensuring we have inventory ready for quick delivery." - Ryan Marshall, President and CEO
  4. Meritage Homes: "38% of our inventory consists of spec homes, which is critical for meeting immediate buyer needs." - Phillippe Lord, CEO
  5. M/I Homes: "60% of our sales were inventory homes, highlighting our focus on ready-to-move-in options." - Phil Creek, CFO
  6. Tri Pointe Homes: "Spec homes accounted for 45% of our inventory, enabling us to capitalize on buyer demand." - Doug Bauer, CEO
  7. Taylor Morrison: "42% of our homes were spec, allowing us to maintain a competitive edge in the market." - Sheryl Palmer, Chairman and CEO
  8. Century Communities: "45% of our inventory consists of spec homes, allowing us to quickly respond to market demand." - Dale Francescon, Co-CEO

Pricing and Incentives

  1. D.R. Horton: "We have increased incentives and discounts to maintain our sales pace." - David Auld, CEO
  2. Lennar: "Our aggressive pricing strategies and incentives have helped us stay competitive." - Rick Beckwitt, Co-CEO
  3. PulteGroup: "We have slightly increased our incentives to drive sales and manage our inventory." - Ryan Marshall, President and CEO
  4. Meritage Homes: "We are maintaining our pricing while offering more incentives to attract buyers." - Phillippe Lord, CEO
  5. M/I Homes: "We used below-market financing incentives to drive sales, particularly for spec homes." - Bob Schottenstein, President and CEO
  6. Tri Pointe Homes: "Targeted incentives have been crucial in maintaining our order pace." - Doug Bauer, CEO
  7. Taylor Morrison: "We are employing a mix of pricing adjustments and incentives to sustain demand." - Sheryl Palmer, Chairman and CEO
  8. Century Communities: "We have strategically adjusted our pricing and incentives to sustain a competitive order pace." - Dale Francescon, Co-CEO

Profit Margins

  1. D.R. Horton: "Our margins remain strong, though we are mindful of potential future pressures." - David Auld, CEO
  2. Lennar: "We are seeing solid margins, but we remain cautious about the pressures ahead." - Rick Beckwitt, Co-CEO
  3. PulteGroup: "While our margins are strong, we are prepared for potential future pressures." - Ryan Marshall, President and CEO
  4. Meritage Homes: "Our margins are robust, but we are wary of possible future pressures." - Phillippe Lord, CEO
  5. M/I Homes: "We achieved record high margins this quarter, though we acknowledge potential pressures ahead." - Bob Schottenstein, President and CEO
  6. Tri Pointe Homes: "Our margins are strong, but we remain cautious about maintaining them in the future." - Doug Bauer, CEO
  7. Taylor Morrison: "We have strong margins, but we are aware of potential future margin pressures." - Sheryl Palmer, Chairman and CEO
  8. Century Communities: "Our profit margins have held up well, but we are prepared to adjust if market conditions require." - Dale Francescon, Co-CEO