Q1 2022 M/I Homes Inc Earnings Call
Parker, VP, Chief Accounting officer, and controller, and Mark Kirk <unk> VP treasurer.
First to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material. During this call because we are prohibited from discussing significant nonpublic items with you directly.
Forward looking statements want to remind everyone that the cautionary language about forward looking statements contained.
And in today's press release also applies to any comments made during this call also be advised that the company undertakes no obligation to update any forward looking statements made during this call with that I'll turn it over to Bob. Thanks, Phil Good afternoon, and thank you for joining us today.
We had a very strong first quarter one of the best first quarters in our company history highlighted by record first quarter revenues and net income and an all time record ending backlog units and backlog value.
We continue to operate against the backdrop of unprecedented housing conditions under.
On the one hand, we are experiencing some of the toughest construction and development challenges our industry has seen with persistent labor and supply chain issues combined with unanticipated delays associated with land entitlement and land development.
Same time demand for housing continues to be very robust.
Although mortgage rates have increased considerably since the beginning of the year demand for new homes across our markets remains strong.
Many of the reasons behind the strong demand are well documented.
Excluding historically low inventory levels.
And an ever increasing number of millennials moving to homeownership.
Moreover, the quality of our buyers continues to be very strong with average credit scores of 747 and average down payments above 16% basically the quality of buyers that we're seeing in terms of credit worthiness is the best we've ever seen.
In terms of our performance, we achieved record first quarter net income of $92 million or $3 16 per diluted share.
It's an 8% improvement in net income over last year's first quarter.
We had record first quarter total revenue of $861 million, an increase of 4% from last year.
Well it was 1823 homes in the quarter, a 10% decrease from a year ago with an average sale price of $457000, which is an increase of 16% and average selling price.
Decline in closings was largely due to the extended cycle times, we are dealing with because of the aforementioned construction labor and supply chain challenges that have impacted our entire industry.
Pre tax income increased 11% to $122 $3 million, a first quarter record.
The actual growth in income was the result of a 40 basis point improvement in our gross margin over last year to 24, 8%.
Our SG&A overhead expense ratio, improving by 50 basis points to 10, 5%.
Our financial services segment also contributed to our positive results for the quarter with pretax income of $13 $1 million.
As a result, our pre tax income margin improved significantly to 14, 2% and we achieved a strong return on equity of 26% during the quarter.
You mentioned demand for new homes remains solid.
We sold 2514 homes during the quarter at.
A decline of 19% from the all time record 3109 homes that we sold during last year's first quarter.
In this year's first quarter, we sold four eight homes monthly per community well ahead of our sales pace in any prior first quarter over the last decade with the exception of last year.
In terms of our sales it's important to note that we are operating at 6% fewer communities than a year ago and on top of that we are limiting or capping our sales and nearly two thirds of our communities in order to manage construction costs deliveries and the timing of land development and lot availability.
Our smart series, which is our most affordable line of homes continues to have a very positive impact on our sales performance.
During the quarter, our smart series sales comprised nearly 46% of total company wide sales compared to 35% a year ago.
And 36% in 2020.
We are now selling our smart series homes and 44% of our communities.
<unk> in previous calls these communities often have more lots in total and in general produce.
On average a greater sales pace better gross margins better cycle time, and better bottom line returns.
Companywide, our backlog sales value at the end of the quarter was $2 $8 billion, an all time record and 17% ahead of a year ago.
Our units in backlog increased by 1% to an all time record 5526 homes with an average selling price in backlog of $505000, which is 16% higher than the average price in backlog a year ago.
Our financial condition is very strong with $1 $7 billion of equity at the end of the quarter, which is an all time record and that equates to a book value per share of $60.
We ended the first quarter with a cash balance of nearly $220 million and zero borrowings under our $550 million unsecured revolving credit facility.
This resulted in a debt to capital ratio of 29% down from 32% a year ago, and a net debt to capital ratio of 22%.
Now I will provide some additional comments on our markets.
We experienced strong performance from our divisions in the first quarter with substantial income contributions led by Dallas, Houston, Tampa, Raleigh, Chicago and Columbus.
However, given that we are operating in fewer communities than a year ago and as I noted that we are limiting sales and nearly two thirds of our communities new contracts for the first quarter in the southern region declined by 27% and by 9% in the northern region.
Our deliveries in the southern region decreased by 13% from last year and our deliveries in the northern region decreased by 5% from last year.
58% of our deliveries came out of the southern region, the balance 42% out of the northern region.
Our owned and controlled lot position in the southern region increased by 12% compared to last year and increased by 4% in the northern region.
One third of our owned and controlled lots are in the northern region. The other two thirds in the southern region.
While we are selling through communities somewhat faster than expected, we fully expect to open a record number of new communities in 2022.
And in addition to further grow our community count in 2023.
We have a very strong land position companywide, we own approximately 24200 lots, which is roughly a three year supply.
Of this total.
30% of the owned lots are in the northern region, where the balances in the southern region on top of the own lots, we controlled via option contracts and additional nearly 22000 lots. So in total our owned and controlled lots are a problem that will come to your conference call.
Tim will provide a fire will be connected to the other participants importantly, roughly hassle they rely on and that we own and control our controller pursuant to <unk> contract, which gives us significant flexibility to react to changes in demand or individually individual market conditions at March.
We have increased our increased our controlled lot one.
Position on a year by 9%.
Before I conclude let me just state that despite the construction development and supply chain challenges demand for new homes remains very strong.
And our financial condition is as solid as it's a welcome to you as we have noticeable operating momentum in nearly all of our markets.
Given our record backlog, our strong margins and backlog along with our plans to open a record number of new communities. This year.
My homes is very well positioned to have another year of strong results in 2022, and with that I'll turn it over to Phil Thanks, Bob as far as financial results, our new contracts were down 33% in January down, 12% in February and down 9% in March and our cancellation rate for the.
First quarter was 7%.
As to our buyer profile about 54% of our first quarter sales were to first time buyers.
At 53% in last year's fourth quarter.
<unk>, 44% of our first quarter sales were inventory homes compared to 45% in 2021 fourth quarter.
Our community Count was $1 76 at the end of the quarter.
Compared to $1 87, a year ago. The breakdown by region is 94 in the northern region and <unk> 82 in the southern region.
During the quarter, we opened 31, new communities, while closing 30.
During last year's first quarter, we opened 21 new communities.
2022, we plan on opening a record number of new communities and ending 2022 with about 200 communities.
We delivered 1823 homes in the first quarter, delivering 38% of our backlog compared to 46% a year ago.
Our construction cycle times continued to increase during the first quarter. They increased by about two weeks from the fourth quarter of last year.
We're very pleased that we started 2004 hundred homes in the first quarter up 4% compared to last year's first quarter.
And at March 31, we had 5700 homes in the field versus 4500 homes in the field a year ago, which is up 25%.
Revenue increased 4% in the first quarter, reaching a first quarter record of $161 million.
Our average closing price for the first quarter was 457000, a 16% increase when compared to last year's first quarter average closing price of 395000 <unk>.
On average sale price is 505000 up from 443000, a year ago, and our backlog average sales price of our smart series is 408000.
Our first quarter gross margin was $24 eight up 40 basis points year over year, and up 160 basis points over our fourth quarter last year and our first quarter SG&A expenses were 10, 5% of revenue improving 50 basis points compared to 11% a year ago.
This reflects greater operating leverage and was our lowest first quarter level in our company history.
Interest expense decreased slightly for the quarter.
We're very pleased with our improved returns for the first quarter. Our pretax income was $14 two versus $13 three a year ago.
And our return on equity was 26% versus 25% a year ago.
During the quarter, we generated 135 million in EBITDA compared to $125 million in last year's first quarter.
Generated $69 million of cash flow from operations in the fourth quarter compared to generating $75 million a year ago.
We had $26 million in capitalized interest on our balance sheet. This is about 1% of total assets.
Our effective tax rate was 25% in the first quarter compared to 23% in last year's first quarter.
This increase in rate was due to the exploration of the energy tax credits for 2022.
Our earnings per diluted share for the quarter increased to $3 16 per share from $2 85 per share last year up 11%.
During the quarter, we repurchased 310000 of our outstanding common shares for $15 4 million, which leaves $133 million available under our current repurchase authorization.
And in the last three quarters, we have spent $67 million buying stock back repurchasing 4% of our outstanding shares. Our current plans based on existing market conditions are to continue repurchasing shares.
Now Derek <unk> will address our mortgage company results.
Phil.
Our mortgage and title operations achieved pretax income of $13 $1 million.
Compared with $19 7 million in 2021 first quarter.
Revenue decreased 19% from last year to $24 $1 million due to a lower volume of loans closed along with significantly lower pricing margins due to increased competition for purchase business.
Loan to value on our first mortgages for the first quarter was 84%.
As last year.
97% of the loans closed in the quarter were conventional and 23% FHA or VA compared to 78% and 22% respectively for 2021 first quarter.
Our average mortgage amount increased to $377000 in 2020, twos first quarter compared to $328000 last year.
However loans originated decreased to 1271 loans, which was down 19% from last year, while the volume of loans sold increased by 3%.
Our borrower profile remains solid with an average down payment of over 16% and an average credit score on mortgages originated by <unk> financial of 747.
Finally, our mortgage operation captured 82% of our business in the first quarter compared to 84% last year.
Now I'll turn the call back over to Phil Thanks, Derik as far as the balance sheet. We ended the first quarter with a cash balance of $219 million and no borrowings under our unsecured revolving credit facility.
Total homebuilding inventory at March 31 was $2 6 billion, an increase of $600 million from last year.
Our unsold land investment at March 31 is $1 1 billion compared to $742 million a year ago.
March 31, we had $721 million of raw land and land under development and 373 million.
<unk> unsold lots during the first quarter, we spent 94 million on land purchases and $101 million on land development for a total of $195 million, which was up from $163 million in last year's first quarter.
In the first quarter of this year, we purchased about 2200 lots of which 70% were wrong in last year's first quarter, we purchased about 2500 lots of which 75% will roll.
We have a strong land position at quarter end controlling 46000 lots up 9% from a year ago. This is about a five year supply.
At the end of the quarter, we had 75 completed inventory homes and 1224 total inventory homes and of the total inventory 733 are in the northern region and 491 or in the southern region.
At March 31, 2021, we had 98 completed inventory homes and 708 total inventory homes. This completes our presentation, we'll now open the call for any questions or comments.
Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
If you change your mind, Please press star followed by two.
One prevents ask your question. Please ensure your phone is on mute.
Our first question today comes from Art Winston from pilot Advisors. Your line is open.
Thank you for a great quarter under difficult operating circumstances.
I was hoping you could describe your rationale.
And you're thinking into only spending $15 million on the stock repurchase.
$95 million on land, excluding land development.
<unk>.
It's becoming more competitive to buy the land and in effect. If you bought your own stock you bought you buy your land and lots of.
Two thirds, one third discount from book value with two thirds of what your cost based on the difference between book value and.
The share price.
Yes, let me let me take initial crack at that and then I think bill will probably add to it first of all clear.
Clearly, we think it makes sense to buyback the stock.
And we're going to continue to as Phil said based upon current market conditions.
I don't disagree with that part of the question in any way keep in mind too that the land that we buy is not land that we just put in contract last week or even the week before or the month before some of these contracts had been in effect for over two years.
And were entered into.
As far back as even late 2019 or early 2020. Some of them were entered into in 2021, we think that they are deals that make tremendous sense for our company well located help us achieve growth goals well priced.
The kind of locations that we think are very smart and important for us to be as we move on down the road. So.
Frankly, because of the age of some of those contracts in particular in particular, we think they really make a lot of sense under current conditions feel I don't know if you want to add anything to that Bob I mean overall, we just continue.
You know to look where we think makes the most sense for us we'd be want to own a two to three year supply of land.
We own about 24000 lots in our run rate is almost 9000, so with them, where we want to be.
We did spend a little more money in the first quarter on land than last year, but the majority of that spend is land development, which helps us get these new stores open.
We actually bought just from a purchase standpoint as I said, we bought about 2200 lots in the first quarter and which was less than last year's 2500, and we have bought back about 4% of the outstanding shares. The last three quarters. So we hear you and understand what youre, saying and we.
With you to some degree we do.
And on continuing to to buy the stock back, especially when it's so much below book value.
It is something that we will focus on.
If you don't mind me, making me a common comment our book value per share probably will approximate $70 per share at Christmas time, and if we look at 'twenty.
20 months to next Chris from Christmas and it should be like $80, which is half of book value and in one of the easiest way to get our returns on equity up is to reduce.
The equity and I think with 133 million authorization.
With over $200 million of unfettered cash in the balance sheet and really extra borrowing power on top of that.
Go into little bit slowly and we need a better balance between the.
Buying land and wouldnt be more aggressive in buying back the stock you don't get these opportunities all the time and that's where the appreciating the excellent job that you guys are doing in the excellent position that we have across the country understanding that but there was hope that the directors and you guys would just become a little bit more aggressive if you don't mind and that's it.
I mean, we're going to see.
I think I think your point is very well made and it's something that we're taking a look at very carefully right now.
Thank you very much and I think the board.
Guys. Thank you.
Thanks, Thank you really appreciate it.
You May now turn to Alex Barron from housing Research Center. Your line is open.
Yeah, Thanks, gentlemen, and good job on the quarter.
Hey, Sam.
Yes, I wanted to focus in on the comment about opening new communities.
I'm guessing that part of the reason the order trends were down it was not.
Just that Youre holding back sales, but that community count continues to go down.
So you mentioned that you're opening a lot of new communities going forward.
I'm just curious.
Where do you expect the community count to end up by the end of the year and are those new communities somehow addressing.
Affordability or are they just basically the same type of.
Of communities that you have right now.
Alex first thing is that as we said the first quarter of last year was the best quarter sales ever we sold over 3000 houses. So we had a very very tough comparable to start with.
We still are very tightly controlling sales and the majority of our communities.
Have a record backlog units and dollar value at $3 31, and we also have 25% more houses in the field at 331 than a year ago. So we'd been tightly controlling that we want to make sure we deliver to our customers.
I'm pleased quality home.
And also you just can't outrun your costs these days and get delivery dates out too far we do plan on opening a record number of stores. We opened 72 stores all of last year. We opened 31 stores just the first quarter.
And when you look at yes, the store count was down on average about 6% for the first quarter.
Our plans are to be around 200 communities by the end of the year.
And ended this year with 175, so there will be substantial community count growth this year.
Yes, we are opening more communities in the second half of the year than the first half, but there's still a substantial number of stores opening in the first half.
So kind of all those factors led to sales being down 19%.
We could have sold a whole lot more houses if we had the construction capacity.
Andrew.
Okay.
In terms of.
Of the sales process.
<unk>.
One of my questions.
How deep are your waitlist.
Comment on that and be.
At what led to the construction or you generally released when it comes for sale.
Well in terms of Waitlists.
There is still there.
Many of our divisions are limiting sales at 100% of their communities.
Not just the substantial majority.
With the recent rise in rates.
There has been a slight underscore the word slight reduction in wait list, but it's still there and the demand is still very strong.
Stronger than I would've thought it would've been frankly, if someone would have told me 90 days ago that rates are going to jump by 200 basis points, but so far.
It's fair to say and I think this is throughout the industry I've heard this from a lot of our competitors that demand for the most part has remained very robust that's what we've seen our online traffic are in.
Community traffic.
And the strength of particularly the strength, we're seeing when we opened up new communities are released new sections of lots.
So.
At this point.
Uh huh.
While the interest rates have gone up in the monthly payments have been affected.
I suspect that no one knows for sure we may start to see a little bit more migration away from the 30 year fixed rate mortgage into perhaps to 10 or seven year arms.
And then a little bit of that but that's been very very slight.
But.
In terms of of <unk>.
When we at what point in the process. The vast majority of our sales are to be built.
Means that.
It's.
Sale occurs before <expletive> .
But it's when we feel we've got a very good.
On the costs and frankly, we also build in contingencies in our housing budgets to cover the.
The kinds of unforeseen inflationary movements, some of which are up some of which have actually been down recently.
But we want to.
To protect our margins.
So yes I.
I guess.
Bill does not want to add anything okay.
Yes, I was going to ask.
Another question I mean, what is the Bill times like these.
And if you're starting with Youre selling homes that foundation right before the summer will go then.
How do you protect that backlog right.
Great keep going higher in other words, a lot of people probably bought thinking they were going to get that 3% mortgage right now.
And now Theyre going to close at five and a half.
Oh.
These rates keep going here.
Operating rate mark or something.
Alex you are right I mean, if you look at people that bought from US last August September they were below 3% and those people closing now we have had almost no body not close.
I think those people realize there is no supply out there.
Most of them understand they are walking into some appreciation day one.
In some cases, some I don't mean to interrupt but in some cases, some very significant appreciation as much as perhaps 10%. So we have not seen.
Hardly anybody not close.
Who knows what'll happen you know in the future, but again, we're not seeing that.
Our issues as far as build times, we've talked about going up a couple of weeks in the last quarter.
For us to close the house this year by December 31, and most of our communities those houses need to be in the field by the end of April .
And like I said, we have 5500 homes in the field.
You know right now at the end of March So we think we're in good.
Good shape for what we think we can accomplish this year.
<unk> cost protection.
To protect yourself best you can Bob also mentioned, we have higher contingencies for sticks and bricks than we've ever had before for things that might happen, but we were pleased that our margins were up in the first quarter compared to last year in the fourth quarter and we feel.
Very good about the.
Backlog margins today. So we think we're in pretty good shape, but again, we're not getting too far ahead of ourselves and Thats. One of the reasons you know our sales were down 19%.
Alright, well, thank you very much and I agree with the last gentleman about.
Stepping up on the share buybacks. Thank you.
Duly noted thank you.
Our next question comes from Jay Mccanless from Wedbush. Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions.
Hello, Jay.
Hey.
Good to talk to you.
Any idea of what percentage of your current lot base was bought pre COVID-19 .
And if you don't have some of them come back to just some of the builders have been tossed in that stat out there and just wondering if you guys had that same stat.
I didn't get the whole question I missed what percentage or what.
Your lot count was bought before Covid.
I mean, we think we're in good shape again, what we try to focus on you know again as having a two to three year owned supply of lots.
And we're in good shape. There. We also have a couple of years on top of that controlled so we think that's been very very good shape.
And I realize that that kind of addresses more the theory that the.
Earlier, you buy at the lower the cost is.
And yet the cost of it is important.
You know us.
More concerned about the location of it.
We really try to focus on what we call a locations.
The better school districts near the better shopping near the better transportation. So we're trying to be sure that we have well located communities. We also spend a whole lot of time on product.
<unk> now with prices increasing so much.
Portability continues to be an issue. So we're trying to make sure our product is as efficient as it can be.
Not overbuilding trying to stay at the best price points. We can so I know that's kind of a long answer, but we think we're in pretty good shape.
Sure.
Lumber prices have been moving and the builders favors for several weeks now I'm just wondering if youre starting to see any of that in the field and if so when do you think it could potentially be a benefit to gross margin.
The second part of that question.
Hi.
Not sure I want to answer without giving it some more thought others on the call here may be able to but I do know that we've seen in a number of our divisions recently indications of anywhere from a two to a 10% drop in lumber.
Not necessarily the same everywhere, but your point is spot on and I would guess.
I'm just guessing.
We're probably.
Six months away or so on average you're seeing it reflected in margins, but I could be wrong, but I would also say agreeing with that you know there's things related to the cost of fuel.
Surcharges in some of those things going up every market's a little different.
Getting windows.
Raj doors, we still have challenges in a number of communities not just availability but cost.
Do you feel good that we've been able to manage those things from a price increase.
Side of it but it's still very challenging out there Jay anyone thats not worried about inflation.
I don't think spending attention.
Placement.
It's not a whole lot we can do about it other than try to manage and be very prudent and careful about.
No.
<unk> land deals.
Some of the questions.
Your earlier question about pre Covid.
Expense management, and I think were being appropriately cautious right now.
Great.
In terms of design center spend what would what did you see during the quarter and maybe any any color you could give about April what youre seeing there I think you said Bob in your prepared comments that traffic had held up online and then the stores during April but would love to know how much people are spending on some of the <unk>.
Things, where theres lot premiums are our design center, given what rates have done yes.
Yes, what I said is that.
Think traffic.
Or wait lists.
As dropped slightly.
It's going to be very market specific but if you had to pay the brush broadly I'd say slightly.
Again, I want to underscore slightly out of luck.
I don't have an exact percentage, but even at the current rate today traffic in the stores traffic online is very strong it may not quite as strong as long as it was a couple of weeks or a month ago, but if it stays like this forever no one would complain and builders report strong sales.
As far as spend on options and lot premiums I don't have that information, but I wouldn't say, we've seen it change a whole lot I mean the.
The majority of the Smart series customers do not go through our design centers.
Actually select out of a couple of pallets, primarily in the models.
<unk>.
We try to stay really focused on a lot premiums et cetera.
So I haven't seen it.
Okay, well, that's all the questions I had thanks, thanks for taking my questions.
Thank you.
As a reminder, this asking further questions. Please press star one on your telephone keypad now.
We now turn to Jesse Adelman from Zelman and Associates. Your line is open.
Hi, Bob and team congrats on the strong results and thanks for taking my question.
Thank you Jessie nice to meet you.
You as well.
Just following up on your comments about affordability can you talk a little bit about pricing power compared to prior quarters, given the rise in rates or are you still pushing price to exceed cost increases and you're just trying to match the cost increases being mindful of affordability.
Are you seeing any pushback.
And certain price points.
Particularly.
I don't think there is.
This is this is this may be more intuitive or.
Reliably anecdotal than scientific because the rates have moved so much so recent.
I'm not sure that there is enough to really.
Okay conclusive statement about that my sense is is that our margins are holding up well.
Right now and that there has been.
Little if any pushback, but I do not believe we have the most pricing power today as we did two months ago.
It's all relative.
Again margins are at a very high level, just right around 25%.
Which is which is a strong margin producing strong 14% to 15% of pre tax returns.
<unk>.
Uh huh.
But with each passing week.
There's a lot of there's a lot of a lot of changes going on right now.
<unk>.
So demand has held up considerably better than I think many of us would have predicted.
Like I said earlier, if we were told 60 days ago rates are going to be five 5% what will happen to demand I think a lot of people would not have predicted that it would still be as strong as it is notwithstanding the historically low levels of inventory and I think the historically low levels of inventory remain a very important.
Eric that is helping to drive demand and keep pricing where it is and.
An increase in the.
<unk> continue to move from renting to owning.
We're getting closer to maybe about where they should be as a homeownership rate still below I think some of the previous generations and the Gen Z are beginning to jump into the pool. So that's a good thing too.
I'm really optimistic about housing.
Very concerned about inflation.
Would expect rates to continue to go up a little bit more we'll have to see how the adjustable rate mortgage pool.
Pool plays out in this.
As you probably know the seven and the 10 year arm or slightly below 5% today. They are in the upper fours.
Nominal rate by most historical standards, but a lot higher than it once was so.
Wish I could give you a more specific answer to your good question, but thats sort of how I see it.
Appreciate that.
And then can you just talk a little bit about what your conversation is like with buyers in backlog, maybe some of the more recent buyers makes a ton of sense that you said about buyers from last year that are approaching close doing what they can to close on the home given the embedded equity that they have.
But maybe if you can give a little bit more color on.
Our buyers doing extended rate locks, what kind of conversations are you having with some of the more recent buyers in backlog. Thanks.
Sure Jeff This is Derrick.
The loans that are with the mortgage company, we continually run stress tests on the backlog and we brought it up to 6% and any buyers in backlog, where it potentially is affecting their qualified ratios will get to them ahead of time and you see what other alternatives there are as far as paying off debt or getting co borrowers. So we are taking a look.
Look into the backlog and we're also giving them opportunities at that time, if they do want to choose to do an extended rate lock or a lot of different variations of long term locks and as the customers may be getting close to qualifying issues present them with all of those different opportunities.
Right now in our backlog about 30% of the loans are locked in so some more or taking advantage of extended rate locks in the current environment.
And how does that 30% compare to.
A typical period and then.
Just another quick follow up is.
Okay.
Well, how many of the company, how many would've been lock zero, perhaps six months probably.
Less than 10% non cancer, but it's on the long term.
And then in terms of buyers that are having some impact with their qualifying ratios.
Or does that kind of stands and how that compared to let's say six months ago.
We really haven't seen any.
Not not be able to close kind of qualifying issues, obviously, you get a little more stress, but we have not seen much fallout with buyers and not being able to qualify dropping out.
Yes.
The other factor in.
Not trying to sugarcoat, but.
When the average down payment is somewhere between 80 and 90000, depending upon the market.
Some of those buyers even have more cash they could put down.
So the combination of embedded equity to use your term, which I like.
Or putting more cash down and thereby reducing the amount borrowed which then impacts a lower monthly payment and may be opting for a 10 year arm instead of a 30 year fixed or not.
I think the buyers have a few tools. These buyers with the 750 credit scores and a fair amount of cash I think they have some options.
Got it makes sense. Thank you so much.
Thank you.
We have a follow up question from Jay Mccanless from Wedbush. Please go ahead.
Sir Your line is now open.
Sorry.
So just to follow up on that line of questioning if.
If mortgage rates were to go to 6% tomorrow, what percentage of the backlog do you think could be at risk.
I don't know if it helps stress tested up to seven if youll have that number that'd be great.
And we've done it.
Just just north of 6% and it varies division by Division and community by community, but on average 10% to 12% could be in jeopardy at 6% interest rates doesn't mean, they don't qualify just need may need that they need to be restructured.
But but we've run it up to 6% so far and then.
If rates continue to rise, we will continue to bump it up and more into the sixes.
And if that did happen while no J, it's a great question, while no one knows.
So if we.
What we do know today is if we had another several hundred specs per sale, which those would become obviously.
It would be sold very fast.
The higher price and a higher price.
Got it and that.
That is the good news now.
It happens everywhere all if it happens everywhere all at once we've been to that movie too right.
Yes, I didn't like that may be very much Edwin.
Okay.
So Derek let me ask you one other question.
We're hearing more about the Gen Z is starting to come into the market is this typically an FHA attached product type buyer are they bringing any type of.
Downpayment assistance, maybe maybe a couple of minutes on what type of credit score and metrics you are seeing from these gen Z buyers.
But again that varies pretty significantly between markets.
In the comments, we said, 23% of our closings were government FHA and VA and only about half of that is FHA, so only 10% to 12% and that's more a product of our sales prices being outside of the FHA loan limits.
And then choosing or not being able to use the FHA financing.
Got it.
Okay, great. Thanks for taking my follow ups I appreciate it.
Thanks Jay.
We have no further questions I'll now hand back to Mr. Phil Creek for closing remarks.
Thank you very much for joining us look forward to talking to you again next quarter.
Today's call is now concluded I would like to thank you for your participation you may now disconnect your lines.
Okay.
Right.
Yes.
Yes.
Okay.
Yes.