Few homebuilders like LGI Homes came of age during the Great Financial Crash with a First Principles determinism centered on the power of a monthly payment to make a renter a homeowner.

Few like LGI are built with a staying power built to flourish during a time that will cull and naturally select others out of the competitive arena.

Some, with deeper capital structures can withstand a bad patch, race to the bottom on price and pace, and pressure rivals to cede market share.

That monthly payments focus – and a systems-based executional excellence empowering it – puts a potential LGI Homes customer at the center of the organization's operational universe. Its land purchase, its product size and repeatability, its simplicity of process, qualifying, and closing are all designed, engineered, packaged, and delivered to unlock a prospect's access to owning a home.

In LGI's earnings call with analysts yesterday, strategic executives deployed a talk-track similar in many ways to public homebuilder peers that came earlier in the cycle, reporting blockbuster full-year 2022 performance against a bevy of supply constraints as well as an incipient market correction, the severity and duration of which remain to be seen.

What differs from those other strategic and operational details of tactics, strategies, performance measures, and expectations is that First Principles approach that sets LGI apart: its DNA-driven model that focuses on pricing-in homebuyers who'd otherwise fall out of the buyer universe.

Just a few choice excerpts from yesterday's call with investors will suffice to carry across that "difference" that comes through, both in what the LGI sets out to solve for and how it drives – via the science of process and systems, rather than trial-by-error campaigns – to make buyers even as business conditions and the economic environment conspire to "unmake" them.

We had to work for every sale," says chairman and ceo Eric Lipar. "We invested time and resources to make certain our people were on process, building, selling, and closing homes the LGI way."

Here's a few more of those verbatim insights from Lipar, that shed light on what the "LGI way" means and does in an uncertain market:

On The Monthly Payment Vs. Rent

Q: Could you discuss the mortgage payment for one of your homes versus an equivalent rent payment? Because clearly rents have been a little bit stickier, maybe a little bit of softening, but not to the same degree.

Eric Lipar

A: It varies, you know, by community, obviously, where the sales price is, and the amount of incentives is community by community as well, but generally speaking, if we pick a standard community entry-level across the country, one of the metrics we've been using is for a monthly payment that somebody has to qualify with their taxes and insurance and everything all in, kind of pre-pandemic, that number is about $1,800 a month, and you need to make about 5,400 a month to qualify for that mortgage, about 3x the payment.

At the peak, which should be about Q4, this past quarter, that number with prices still elevated and interest rates getting to seven, that got up to about $2,800 a month, which meant you had to make $8,400 a month. So, 5,400 to 8,400 is a big dollar amount. Interest rates spiked back up last week, but generally, in the 6.5 range where we've, kind of been averaging 6.25 to 6.50 over the first eight weeks of the year. We take about 2,400 a month apples to apples. So, that's better.

And, you know, that $400 a month decrease through mortgages and pricing up its peak, we believe it has made a difference in our business. That is certainly higher than most people can rent a single family for or an apartment, but that's always been the case, but that spread is probably more elevated. We've got some of the national stuff that you have access to, but it's more elevated than normal, the difference between renting and ownership."

On Modifying Product To Price Buyers In

Q: Do you have a sense, Eric, as to, roughly all in, including incentives and base price cuts, or however you look at it, what do you think the peak-to-trough decline in asking price was for LGI?

Eric Lipar

We are seeing customers select smaller plans, you know, for the same monthly payments. Instead of selecting the [1,600-square-foot or 1,800- square-foot] [ph] house, we're seeing a lot of 1,300- square-foot or 1,400-square-foot houses selected or purchased.

We're also working on new floor plans that has smaller square footages. That's not a trigger we can pull in a lot of communities, but some communities are rolling out smaller square footage plans to help with affordability. So, it's really community by community."

On Pace, Price & Cost Expectations

Q: How [should one] think about gross margins as the year progresses and your confidence or what's driving the view that things will be improving from 4Q levels as you progress in 2023?

Eric Lipar

We just need to find the price associated with moving inventory. And a lot of our peer group have talked about that. And that price led to a lower gross margin, but also is working from a sales standpoint.

So, we're really excited about the first seven or eight weeks year of sales averaging 7.2 retail net sales per community. And we've been raising prices as we go. As our gross margin  implies for the year, we plan on raising – increasing gross margin through a combination of both raising prices, and also the homes that are closing in Q4 and also in Q1 were built at the most expensive house costs. So, every time we closed a house, if the price is the same, gross margins will be improving."