Q3 2022 Tri Pointe Homes Inc (Delaware) Earnings Call
Ladies and gentlemen, greetings and welcome to the Tri Pointe homes third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I will now turn the conference over to David Lee General Counsel.
Please go ahead Sir.
Good morning, and welcome to Tri Pointe homes earnings Conference call.
Earlier this morning, the company released its financial results for the third quarter of 2022.
Documents detailing these results, including a slide deck.
<unk> at Www Dot Tri Pointe homes Dot com through the investors link under the events and presentations tab.
Before the call begins I would like to remind everyone that certain statements made on this call which are not historical facts.
<unk> statements concerning future financial and operating performance are forward looking statements that involve risks and uncertainties.
A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings.
Except as required by law the company undertakes no duty to update these forward looking statements.
Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Tri Pointe web site and in.
<unk> SEC filings.
Hosting the call today are Doug Bauer, the company's Chief Executive Officer.
Glenn Keeler, the company's Chief Financial Officer.
Tom Mitchell, the Companys, Chief operating officer and President.
And Linda MA the Companys Chief marketing Officer.
With that I will now turn the call over to Doug.
Good morning, and thank you for joining us today as we go over our results for the third quarter of 2022.
And provide an update on current business conditions and our strategic plan.
Tri Pointe homes produced outstanding results in the third quarter.
We delivered 1463 homes.
With an average gross margin of 27, 1%.
January net income of $149 million or $1.45 per diluted share.
This represented a 24% increase in earnings per share compared to the third quarter of 2021.
Our teams did an excellent job managing through a very challenging supply chain environment.
Resulting deliveries at the high end of our guidance range.
Our experienced management team has the right strategies in place to continue producing strong results in the fourth quarter.
Including focusing on the delivery of our high margin homes in backlog, while also navigating the housing correction the industry is facing.
As the housing market has continued to weaken due to the rapid rise in mortgage rates, our order demand slowed significantly during the quarter, resulting in an absorption pace of 1.8 orders per community per month.
Demand was soft at the start of the quarter, but picked up in August when mortgage rates went down to the low 5% range and.
And we can again as rates approached 7% in the back half of the quarter.
The volatility in rates, along with the growing uncertainty around the economy.
Let's put many prospective buyers in a wait and see frame of mind and let certain buyers in backlog to reconsider their purchase.
We continue to prioritize the preservation of our backlog and our offering solutions to offset monthly payment and affordability challenges buyers are facing.
So navigate today's reality, we have implemented several tactics to help our customers purchase and closed on their homes.
We are providing below market financing solutions to both buyers and backlog and new buyers by utilizing forward commitments.
Temporary and permanent rate buy downs and.
An extended rate locks to lower monthly payments, providing buyers with a peace of mind, leading up to their home closing.
In addition to financing assistance, we're leveraging promotions such as closing cost contributions design studio credits and special pricing on available homes for a year and deliveries.
As we have experienced in past corrections.
Initial demand is best achieved by utilizing incentives tailored to individual needs.
Throughout the third quarter, we have had some success implementing this strategy. However.
As rates have continued to increase we are seeing better results as we focus on price discounts.
Going forward, we will continue to implement effective price strategies to improve absorption at all existing and new communities.
96% of our buyers in backlog, who are financing their purchase with Tri Pointe connect for year end deliveries are currently rate locked.
We continue to use a disciplined prequalification process for our new homebuyers prior to executing purchase agreements.
And the quality of our homebuyers continues to be strong.
Our average buyer FICO score is 749.
Loan to value ratio is 80%.
And average debt to income ratio was 40% with an average annual household income of $182000.
Millennial buyers represent 57% of our backlog financing with Tri Pointe connect a 3% year over year increase.
It is important to note that today's buyers value certainty and are looking to shorten the time between San Juan closing, so we plan to maintain our balanced approach to billing specs, which have historically trended towards 60% of our total starts.
In the third quarter, 67% of our orders were on spec homes.
As always we are focused on managing and maintaining appropriate levels of spec inventory as.
As well as focusing on pace, using a rational and well informed pricing strategy.
For an update on our markets the West region had some good results with the inland Empire, San Diego, Las Vegas, and Washington markets performing better than the company average.
Sacramento and the Bay area were weaker performing markets in the quarter.
The Central region had mixed results with our Austin Division fairing relatively well while demand in Colorado was sluggish.
In the east the Charlotte market continues to have a good demand, especially at our newer communities.
As we have previously discussed we have a strong land pipeline and plan to open approximately 90 to 100 new communities over the next five quarters.
The majority of these new communities were put under contract prior to 2021.
And therefore, having attractive land basis that will allow us to enter the market with competitive pricing.
They also had the advantage of being in a locations.
Two employment transportation, good schools and amenities a standard for Tri Pointe.
It is important to note that these new communities have been planned and designed with appropriate product types features and amenities to help combat the affordability challenges at a higher interest rate environment presents.
Recent examples of this approach are a premium entry level communities price from the mid 400000.
Including terrorist collection at our bar W Ranch in Austin.
Which achieved four seven orders per month in the third quarter.
And Meyer Townhomes in San Diego County, which obtained five orders per month.
We also achieved strong third quarter order pace of three three per month in the highly desirable.
Ply constrained Gilbert Submarket in Arizona.
Where our waterston North planned community serves move up homebuyers and six communities price from the 600, thousands to low $1 million.
Lastly, we are seeing success in our lending Creek single family detached homes in Dallas.
With four seven orders per month, and we have high expectations for our three new planned community offerings in Dallas This month.
Each with strong interest list, such as Union parking little Elm price from the mid 400 thousands.
In addition to design design solutions to help ease today's affordability challenges.
We are also implementing intentional cost reduction strategies across the organization in response to slowing demand.
We have established goals to reduce build cycle times and initiate year over year cost reductions to bring costs in line with current market conditions.
By working closely with our trade partners, we have already seen relief with respect to costs associated with the front end of the build process.
In addition, we continue to drive efficiencies in our SG&A spending through the use of technology and process improvements.
And by reviewing overhead to be in line with future production levels.
With respect to our land position at the end of the third quarter, we have 37000 lots in our land pipeline.
56% of which are one and 44% are under control via option.
We continue our disciplined approach to re underwrite and stress test all land deals under contract to current market conditions.
We are working with land sellers and land bankers to renegotiate the terms of our option agreements to slow the rate of takedowns and in some cases lower the contracted price.
We continue to balance our capital allocation between reinvesting in the business.
Repurchasing shares to maximize shareholder return, while maintaining appropriate levels of liquidity.
The sharp increase in interest rates has put a strain on housing affordability and created a more challenging sales environment for our industry.
But we have an experienced management team that is well equipped to succeed in this new reality.
We look forward to closing out 2022 was strong earnings while implementing the strategies for Tri Pointe that will provide success in the current market conditions.
With that I'd like to turn the call over to Glenn who will provide more details about our results this quarter Glenn.
Thanks, Doug and good morning, I'm going to highlight some of our results and key financial metrics for the third quarter, and then finish my remarks, with our expectations and outlook for the fourth quarter of 2022.
At times I'll be referring to certain information from our slide deck, which is posted on our website slides.
Slide six of the earnings call deck provides some of the financial and operational highlights from our third quarter.
We reported outstanding results on all key financial metrics this quarter that either met or exceeded our stated guidance. We delivered 1463 homes at an average selling price of 723000 resulted in home sales revenue of approximately $1 1 billion.
Our homebuilding gross margin percentage for the quarter was 27, 1%.
And SG&A expense as a percentage of home sales revenue came in at nine 1%.
This resulted in income before tax as a percentage of home sales revenue of 18, 6%, which was 130 basis point improvement compared to the third quarter of 2021.
As we have discussed order demand slowed significantly during the quarter, resulting in 681 net new home orders, which was a 50% decrease compared to the prior year instead.
Incentives on deliveries during the quarter continued to be low at one 6% of home sales revenue.
Incentives on new orders in the quarter increased to an average of roughly 5%.
As rates increased throughout the quarter. So did the level of cancellations. We had 258 gross cancellations during the quarter 40 of which were buyers that transferred to a different lot within the same community the.
Net cancellation number of 218 represented five 7% of our opening backlog for the quarter compared to 3% for the same period a year ago.
Turning to communities, we opened 17, new communities during the quarter and closed out of 7% to end the quarter with 133 active selling communities.
As Doug mentioned earlier, we had a strong new community pipeline that will result in significant community count growth.
We expect to end 2022 with between 135 and 140 active selling community and looking forward. We anticipate to end 2023 with between 190 and 200 active selling communities.
It should be noted that a good portion of that community count increase comes in are more attainable price premium entry level and first move up buyer segments in the central and east growth markets of Texas and the Carolinas.
Accordingly, you will see our average sales price come down over the next few years as these new communities change our mix of deliveries.
Looking at the balance sheet, we are extremely focused on managing our inventory levels to match demand trends being disciplined in our land spending and ultimately generating positive cash flow during.
During the quarter, we continue to be opportunistic with our share repurchase program acquiring another 949000 shares our total outstanding share count has decreased 26% since the start of 2020, and we now have $222 million remaining on our current repurchase authorization.
At quarter end, our total outstanding debt was $1 3 billion, resulting in a debt to capital ratio of 33, 8% and a net debt to net capital ratio of 29, 7%.
We ended the quarter with approximately $914 million of liquidity, consisting of $228 million of cash on hand, and $686 million available under our unsecured revolving credit facility.
Our plan to generate significant positive cash flow during the quarter, the fourth quarter and end the year with net debt to capital ratio in the low 20% range, which is similar to the prior year.
During the quarter, we invested $190 million on land and land development.
For the full year of 2022, we expect to invest approximately 900 million on land and land development.
Given the changing demand environment and our already strong land position, we anticipate land spending next year to decrease by approximately 40% compared to the current year levels.
Now I'd like to summarize our outlook for the fourth quarter, we anticipate delivering between 7500 1900 homes at an average sales price between 700700 15000 in the fourth quarter.
We expect homebuilding gross margin percentage to be in the range of 25% to 26% for the fourth quarter and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 8% to 9%.
Lastly, we expect our effective tax rate for the fourth quarter to be in the range of 24% to 25%.
With that I will now turn the call back over to Doug for some closing remarks.
Thanks, Glenn while the rise in interest rates and softening buyer sentiment have made for a more difficult sales environment.
We are by no means discouraged by these challenges.
The long term macro environment for the housing industry continues to be very bright.
Due to the lack of supply in the housing deficit that has fallen short immediate household formation since 2009.
In fact in many ways, we are energized by the opportunities that will arise for well capitalized builders like Tri Pointe.
To establish and strengthen market positions.
We have a solid balance sheet and excellent liquidity, which will allow us to operate from a position of strength. During this period of uncertainty and to capitalize on any opportunities that could arise as a result of this market correction.
We know from experience that the decisions and operational strategies, a builder employees during periods of uncertainty.
Set the stage for how it performs in the next up cycle.
We have a comprehensive plan in place to stay competitive and sell homes in todays market, while simultaneously positioning our company for success over the long term.
Finally, I'd like to thank all our team members for their efforts this quarter.
A big reason for the confidence I have in the future of this company.
Stems from the hard work perseverance and dedication.
Witness across our organization on a daily basis.
We have put together a strong and talented team here at Tri Pointe and I truly enjoy working alongside all of you as we build something great.
That concludes our prepared remarks, and now we'd like to open the call up for questions. Thank you.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
Ladies and gentlemen, we will wait for a moment while the.
Question queue assembles.
Our first question comes from the line of Stephen Kim from Evercore. Please go ahead.
Yes, Thanks, a lot I appreciate all the color I was wondering if you could tell us a little bit more about your <unk>.
Our incentives I think Glenn you mentioned that you are running at around 5% right now I assume thats not including base.
Price reductions.
To get a sense is that true and if so how much base price reductions just taken an estimate.
Biding and estimate how much that might be.
Year over year.
And then also are you are you finding the need to offer what you might call late stage incentives.
As folks come to the closing table.
Hey, Stephen Good question. This is Glenn so so far base true based price discounts have been pretty minimal we 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 based price discounts or reduce base price.
It's pretty small in the overall picture.
And then for the late stage incentives Linda do you want to add some color there.
Secondly, we really worked closely with customers as they are approaching the closing to ensure that that comfortable and ready to move forward and close on the schedule date. So we do typically see more.
A renegotiation or assistance additional financing is coming.
Coming in at the late stage other than of course done upfront at the time of the picture.
With things like fully.
And those late stage incentives to provide a little bit more detail around that are you are you, saying that those would be things like.
Rate buy downs or things of that nature or 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 your target.
And how far above that targeted range do you think you might run in the near term.
Yeah.
The physical on those late stage in attendance it might be Steven an example, where we gave closing costs and the timing of contracts and we then we're giving some additional ethane therefore.
By a rate down.
That didn't already have a long cane locked in place.
Or it might be in the form.
CDO credits.
I have been additional changes in the market from when they originally purchased.
Great.
Relative respect Steven.
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 it closed 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.
Okay.
Alright, well I appreciate it thanks, a lot guys.
Thanks Steven.
Thank you next.
Our next question comes from the line of Alan Ratner from Zelman and Associates. Please go ahead.
Hey, guys good morning.
Nice execution, considering the tough environment out there.
My first question just kind of wanted to touch on the.
Price versus pace equation, and I know in the past you've kind of highlighted to us that.
Push comes to shove youre going to focus on pace and getting a respectable absorption pace.
When I look at your results this quarter, 5% incentive as it kind of seems like middle of the road compared to what we're hearing from your competitors, maybe even a bit on the lower end, there and yet your order decline of 50% is probably a bit greater than average. So I'm just curious how youre thinking about that equation today are you seeing that.
<unk> city in the market when you do get more aggressive with incentives, where it's making a notable difference to your sales pace and how should we expect that to play out here over the next couple of quarters.
Yes, it's a great question Alan.
We were we've got going into the year with an excellent backlog as you pointed out <unk>.
Produced some excellent numbers for the third quarter and we expect to produce a very strong 22. So it's kind of a tale of two two markets right I mean.
Our operators are incentivized to keep there their backlog to get to year end closings.
This has been such a rapid interest rate environment changing from five to six to seven six.
So it's a little bit more of an art than a science, we were pushing as we mentioned in the remarks more on incentives.
To hold people in backlog to test the market, we saw frankly, some aggressive pricing behavior that really just created some gross activity but E.
Like amount of cans.
So I think as you go as we go into the new ended the year and going into the new year on existing programs, we will implement rational and effective price strategies to maintain a steady.
Absorption, but.
It's an interesting environment. The consumer is getting hit on both sides. They read every day rates are going up and then they they think well as our prices going down so.
Sometimes the incremental pace.
With additional incentives and base price adjustments don't even do anything so again, it's a little bit more art than science, but we will focus and continue to focus on pace going into.
The new year.
And with our new communities that were opening.
We've got these three new committee as we pointed out in Dallas I mean, there's hundreds of people on the interest list going through pre qualifications right now theyre well positioned great locations, great price. So it's going to be a choppy time, but we're well prepared for it.
That's very helpful context, Thank you for the comments there.
Second question.
Hosted helpful Analyst day back in May and gave some longer term targets and obviously the world has changed quite a bit since then and I'm sure it'll change quite a bit more here in the next handful of quarters, but I'm just trying to think about when you think about your growth plans that you laid forth in may and you already touched on earlier on this call.
The community count guidance for 'twenty, three so it sounds like Youre still kind of moving forward with those plans here has anything changed about how youre thinking about the next few years either from a risk standpoint from a balance sheet standpoint from a land perspective, you mentioned pulling back quite a bit on land spend next year, but I'm guessing that doesn't impact your 'twenty three 'twenty four.
Growth outlook, a whole lot given your current land pipeline. So just I'm not looking for updated targets, they're just more qualitatively if if if.
Any of those items you mentioned back in May have changed.
Well I think it's changed significantly as far as the macro environment for housing right.
Interest rates have more than doubled.
For the consumer.
It's anybody's guess, where where the fed goes with with the.
It looks like we're going to continue to see rate increases so.
We put together our strategic playbook at the beginning of the year anticipating this higher rate environment due to the inflation. So part of our strategy. We have an excellent land position on a number of our communities were purchased to pre 'twenty one as we highlighted in our May Investor day.
Have we pushed those out a little bit yes.
It's a little bit of that slower.
Our execution, we still believe in that growth, we still believe in those communities because they are well positioned in a locations there being able to be priced very attractively as I mentioned and in these communities in Dallas and in.
Yes.
Well all the other communities, we highlighted so it looks like Allen.
If I was to predict.
I think the housing market and starts we'll pull back dramatically in 'twenty three we're going to we've already we're under supplied and I think going into 'twenty four we're going to see a bounce back because there is no supply the resale market is effectively locked in at sub three.
Five 4% mortgages, there's still plenty of millennials and buyers that need housing a lot of them are on the sidelines. So starting these new communities as we look at them in 'twenty three going into 'twenty, four I think could be positioned very well.
To meet that need going into the latter half of 'twenty, three and going into 'twenty four or so.
That's the way, we're planet Casto and cash flow positive cash flow is number one.
And we're going to focus on keeping our balance sheet very strong.
Debt to cap ratios net will be in the low twenties.
Because we also sense there could be opportunities for us to change our market position going through the next 12 months to 18 months.
Very helpful. Doug Thanks for all the thoughts there good luck.
Thank you.
Question comes from the line of Carl.
Alright caught from BP.
Please go ahead.
Not to say everybody.
The 90 to 100 new communities coming.
Can you talk about.
What percentage of those you think would be sort of more spec focused and more premium entry level versus move up.
Definitely I'm asking is it's a big it's a big running growth is that going to change your mix <unk> move you away from the 60% of total start spec long term or the these new communities sort of come in at the same historic spec and premium entry level mix that <unk> had.
Yeah. Good good questions. Carl This is Tom I think.
Approximately 60% of the new communities are really coming in the premium entry level position as you know we've been focused on geographic diversity and I think a large portion of these new communities are coming out of our southeast <unk>.
Jen.
Which is really at more attainable and affordable price points. So we're really thinking that this.
Sure.
Community expansion is going to benefit us through the current.
Market environment.
Yes, Karl when you look at the Central and East South East region that I think we pointed that out back in May that's a big part of what we were had been repositioning to that premium entry level and as we mentioned in the prepared remarks, our asps will be coming down because of that change in mix.
Mix.
Sure.
I understand that I'm, just curious if the ASP is coming down because prices generally are lower in those new markets versus more entry level compared to move up but I think you've got the answer to me Doug on the trade side I mean, I think almost every builder has said the front end is starting to get more available and loosening up are you seeing any anything.
The Midland trades, now like rough frame side or.
A rough electrics things like that and from a materials perspective, we for builders complain about <unk> are there any others that where youre seeing significant issues in terms of obtaining them or where are we starting to see some improvement on things like windows and doors from your perspective. Thanks.
Well windows.
Windows are improved.
Appliances in some cases have not.
We characterize the backend.
Still a challenge for our teams across the country. My prediction is by the end of the first quarter the backend will realize that.
Housing sales and starts had pulled back dramatically and they'll be looking for work just like the front end.
So we are.
<unk> double digit.
We're targeting double digit decreases to our cost structure going into 'twenty. Three obviously with these new communities. We're enjoying some of that with the recent lumber drops as well so.
But it's going to take until the first quarter before the backend realizes that their backlog is not as strong as they thought it would be.
Great. Thanks, Doug I appreciate it.
Thank you.
Our next question comes from the line of Alex <unk>.
From B Riley. Please go ahead.
Thank you.
Yes.
Okay.
Excuse me can you quantify the cost reduction actions to date.
And you.
Maybe talk a little bit about future cost reduction actions to take place.
Yes.
Go ahead go ahead.
Go ahead.
We're targeting.
From ended this year to the end of next year, a double digit price reduction strategy. So we are still in their early stages of that so.
So it's a little early to quantify it but thats the quantity, we just quantified what we're targeting.
Ross the country.
For the FERC to Alec.
I was going to add obviously that is.
Occurring with with re bidding certainly it's occurring as we're looking at new projects coming forward.
And focusing on trades.
That have more availability.
Certainly.
Emphasis is on making sure we have the right product coming to market to achieve the lowest possible retail prices for the consumers. So we've really done a really good job of really looking at all new product types coming into the market looking at value enhancement value engineering on all of those products to ensure we are.
Producing the lowest cost structure possible.
And then as it relates to the spec strategy with a target of about five per community that finished or underdevelopment and where did you stand coming out of third quarter.
Yes, Alex that is.
For in process backs standing at the end of the third quarter. We ended right around 100 completed units, which was less than one per community.
Thank you.
Thank you.
Our next question comes from the line of Jay Mccanless from Wedbush. Please go ahead.
Hi, Thanks for taking my questions.
First one I had when we think about the ASP going into 'twenty three is it going to have more of a call. It a mid sixes type feel or is it still going to be low sevens.
Any help you could give us on that.
Well it depends on the kind of the pricing environment going into next year, Jay, but where we sit today I think youll see it in the six's probably.
Mid to high <unk> is kind of the best range to think about where we sit today.
Okay.
And then I think Tom talked earlier about lumber prices coming down I guess, when when should we expect that to be a tailwind for gross margin.
Yes.
<unk> prices, we've seen over the last couple of quarters have been the lowest in years for sure and so youll start seeing that coming through margin in the first half of next year.
Okay.
And then just the other question I had.
It sounds like you guys, maybe resetting some of the base pricing as you're opening the newer communities.
Any sense of what that what the new prices relative to the old old pricing may have underwritten it out as it <unk>.
5% lower 10% lower just trying to get a sense of how much are having to work on base pricing to drive affordability.
Yes, Jay that's a great question.
We're all trying to determine exactly what that price is.
Certainly different communities are performing differently and have different market expectations, but I would say that youre going to be looking at.
Rice discovery, that's in the 5% to 20% range is our best estimate right now and in some cases J. It actually is still maybe above underwriting because it was underwritten two or three years ago, but below where we thought it was going to be a couple of months ago six months ago. So it depends on when the community was underwritten to.
Okay, Great. That's all I had thanks for taking my questions.
Okay.
Thank you.
Our next question comes from the line of Truman Patterson from Wolfe Research. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
First question regarding the 5% incentive level is there any way you can help us think through that how the September or October kind of exit rate was.
And then also could you go across your markets and discuss maybe which regions or states.
Youre seeing the highest level of incentives potentially quantify some of those regions.
Sure Truman this is Linda.
Secondly, <unk> has increased during the quarter in line with the increase in interest rates and levels of consumer confidence.
Generally.
Within leasing that all markets and all buyers are.
Great.
Impacted by rapidly increasing rate so it would be difficult to say that there was any one particular market, where there is a greater level.
Sure.
It is very much community by community, depending on labor less competitive supply in the market.
Stage construction.
Particular community for Enzo becomes.
In general.
At some point as Doug stated earlier, we can only very soon.
<unk> and the levels that we can buy interest rates down to that point, we would also be looking at layering and base price changes ethylene Scott.
Okay. Okay. Thanks for that.
And then Doug.
You mentioned earlier in Q&A.
That you're expecting the housing market will pull back dramatically in 2023.
Given the widespread and mortgage rates versus the 10 year treasuries.
Mortgage rates settled let's just say around the 6% level in 2023 does that really change your thinking.
Much or has kind of the negative buyer psychology permeated.
Where your view doesn't change that much I'm, just trying to understand the potential elasticity of buyer demand.
Yes.
When you look at the.
The cancellation activity and the reason reasonings for cancellation, it's Linda I would say, it's too highly psychologically more than that financially our buyer profile is really strong so.
I am of the belief Truman that.
The consumer if they saw.
That there was a leveling of interest rates pick a rate, 6% like you said.
It's pretty simple math, you just get to the right price and the right payment after that right now the psychology of the buyer is is a little bit disruptive because they are reading on one hand, how Florida rates go Dear and then on the other hand, where prices go the spread.
To the mortgage market right now by the way and I am sure Youre aware of this has a lot to do with the liquidity in the mortgage market the fed and the banks are effectively out so you've got the MBS reach out there and so there is a higher risk premium rate to what's going on in the mortgage market.
Some of those mortgage REIT are having.
Mark to market calls as well so.
Once that settles down there is a tremendous amount of demand sitting on the sidelines, just deciding where can we enter and that we're at a stable place and stability is my biggest.
Concern.
If I was talking to the fed today to say hey, let's just create a more stable environment because the consumer will we will then engage into the housing cycle in housing is the tip of the spear for the economy right. I mean, we have a significant multiplier effect and if housing starts go down double digit fan.
And next year, that's going to have a significant impact on the economy, which.
As where we're trending so it's it's a fascinating time I'm actually energized by the whole darn thing because we've got a.
A very well oiled machine with a lot of liquidity, we're going to build more liquidity and frankly, I hope, there's tremendous opportunities to increase market position. So.
We'll see what happens.
Alright, well, thanks for the time and good luck in the coming quarter.
Chairman.
Thank you.
Our next question comes from the line of Alex Barron from housing Research Center. Please go ahead.
Yes, thanks gentlemen.
And then.
Can you provide me starts for the quarter and versus last year.
I'm just curious about that.
Starts for the quarter was around 900, Alex and compared to the last quarter was.
I don't have that in front of me, we were down about 65% from the prior to the second quarter sequentially. So.
We've cut back on starts quite a bit obviously, we have a significant number of in process.
It is our goal to balance.
Our absorption pace in our start pace.
Yeah.
Okay.
Good.
Sure.
And then I guess given the.
Given the limitations that you mentioned on being able to buy down rates. I was just curious what are those limitations are you able to buy them down 200 basis points or it's not quite that far.
Yes, Alex this is Linda.
Certainly as rates increase.
Hard to buy them down substantially and becomes more expensive to do so.
And then we also had stellar condition based on the loan type where theres a limit to how much we can contribute and closing costs for the buyer.
Does that swing when we can still use in things like temporary rate buy downs that could get you a lower initial.
Initial rate the bias is still qualifying at the note rate and there is.
Just in that as well as some growing interest in <unk>, especially in the jumbo area.
Yes, okay.
Just trying to get a sense of rates or 7%.
Is it possible to buy them down to five or is that too extreme.
Thank you Ken.
The price cut that.
Yes, Ed Stevens Athene, we can still buy down to about five and a quarter.
And we can still provide some additional santa Paula paint closing costs.
So yes, there is still room to do that in today's market is getting more challenging to get rates into that point.
And we can really only get the Arista and things like that.
Temporary by Dan.
And Alex I would just add that the longer the term that you are trying to lock in the rate the more difficult. It is to get to those lower rate structures that you're talking about so another reason that buyers are looking for certainty of close.
Alright, so related to that what is right now your average build time and what's the range in which are the best markets with the shorter Bill times, which are the markets with the longest bill clients.
Yes quarter over quarter were kind of flat on our cycle times right now.
The year over year, we're probably a couple of weeks long in general across the company on average we're about two months over our regular construction cycle times.
The shorter cycle times are really down in the southeast in the Carolinas.
And the longest cycle times right now are in the Arizona market.
Got it okay.
On average Alex's, Doug our company's construction start to completion time is around seven months.
Okay, I was just asking because of that whole issue that.
Buyers I guess want something that can close.
Relatively quickly and also what you mentioned about being able to lock in rates I was just curious how hard it was in there.
Longer build time markets to be able to do that.
Well that's a good question and so we're focused on two strategies. There one is to maintain a healthy spec level as we mentioned in the call 60% of our starts.
Our spec.
And where we have a higher demand communities.
We may push that we will push that button even further.
Other things that we're looking at going into 'twenty three is the shortened.
Those cycle times.
Hopefully we can bring those in by a month or so so that will help create that certainty that we were talking about and what you are asking about so a combination of those factors will definitely help in the Grand scheme of things.
Sorry to ask one more but if I could go on that front, let's take the market like Phoenix.
Is there any.
Historically yourselves and other builders have outsourced most of the labor. So is there any possibility.
Maybe.
Consider changing that and bringing some people on your staff that would help shorten that cycle time, rather than depend on outside.
Subcontractors.
My my personal opinion is no.
Thank you.
With the pullback in starts and I think you've done a really good job of documenting some of that in some of your reports.
I like reading, there's going to be an excess labor market and the subs.
We will have we already seen in the front end will be very hungry. So.
I'm not looking to add overhead in the anticipation of that shrinking our cycle times. It will naturally happen, whether you're in Arizona, Texas, California Carolina.
There'll be excess labor supply as you go into the first half first half of next year.
Got it thanks a lot.
Good luck guys.
Thanks.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
Now I would like to turn the conference over to Mr. Doug <unk> for closing comments.
Well, thanks, everybody for attending today's call and we look forward to reporting.
Strong 2022 earnings early next year.
Have a great weekend. Thank you.
Thank you.
The conference of Tri Pointe homes has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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Yes.
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