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spk03: Greetings and welcome to the TriPoint 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.
spk13: Good morning and welcome to TriPoint 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, are available at www.tripointhomes.com through the investors link and 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, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. The 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 TriPoint's website and in its 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 company's chief operating officer and president, and Linda Mamet, the company's chief marketing officer. With that, I will now turn the call over to Doug.
spk08: 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. TriPoint Homes produced outstanding results in the third quarter. We delivered 1,463 homes with an average gross margin of 27.1%, generating 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 and 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 weakened again as rates approached 7% in the back half of the quarter. The volatility in rates, along with the growing uncertainty around the economy, has put many prospective buyers in a wait-and-see frame of mind and led certain buyers in backlog to reconsider their purchase. We continue to prioritize the preservation of our backlog and are offering solutions to offset monthly payment and affordability challenges buyers are facing. To navigate today's reality, we have implemented several tactics to help our customers purchase and close 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 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 are leveraging promotions such as closing cost contributions, design studio credits, and special pricing on available homes for year-end 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 TriPoint Connect for year-end deliveries are currently rate locked. We continue to use a disciplined pre-qualification process for our new home buyers prior to executing purchase agreements. And the quality of our home buyers continues to be strong. Our average buyer FICO score is 749, loan to value ratio is 80%, and average debt to income ratio is 40%, with an average annual household income of $182,000. Millennial buyers represent 57% of our backlog financing with TriPoint Connect, a 3% year-over-year increase. It's important to note that today's buyers value certainty, and are looking to shorten the time between sale and 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 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 faring 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 have an attractive land basis that will allow us to enter the market with competitive pricing. They also had the advantage of being in a locations. Close to employment, transportation, good schools and amenities. a standard for TriPoint. 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 that a higher interest rate environment presents. Recent examples of this approach are premium entry-level communities priced from the mid-$400,000s, including Terrace Collection at our Bar W Ranch in Austin, which achieved 4.7 orders per month in the third quarter, and Meijer Townhomes in San Diego County, which attained five orders per month. We also achieved strong third quarter order pace of 3.3 per month in the highly desirable supply constraint Gilbert Submarket in Arizona, where our Waterston North Plan Community serves move-up homebuyers in six communities priced from the $600,000s to low $1 million. Lastly, we have seen success at our Lennon Creek single-family detached homes in Dallas, with 4.7 orders per month, and we have high expectations for our three new planned community offerings in Dallas this month, each with strong interest lists, such as Union Park and Little Elm, priced from the mid $400,000s. In addition to 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 37,000 lots in our land pipeline, 56% of which are owned 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 and 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 with strong earnings while implementing the strategies for TriPoint 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?
spk07: 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 will be referring to certain information from our slide deck, which is posted on our website. 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 1,463 homes at an average selling price of $723,000, resulting in home sales revenue of approximately $1.1 billion. Our home building gross margin percentage for the quarter was 27.1%, and SG&A expense as a percentage of home sales revenue came in at 9.1%. 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. Incentives on deliveries during the quarter continued to be low at 1.6% of home sales revenue, but 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 5.7% 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 account growth. We expect to end 2022 with between 135 and 140 active selling communities. 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 account increase comes in our more attainably priced 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 the quarter, we continue to be opportunistic with our share repurchase program, acquiring another 949,000 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. We plan to generate significant positive cash flow during 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 1,700 and 1,900 homes at an average sales price between $700,000 and $715,000 in the fourth quarter. We expect home building 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.
spk08: 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 and the housing deficit that has fallen short of meeting household formation since 2009. In fact, in many ways, we are energized by the opportunities that will arise for well-capitalized builders like TriPoint 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 employs 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 today's 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 I witness across our organization on a daily basis. We have put together a strong and talented team here at TriPoint, 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.
spk03: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 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.
spk10: Yeah, thanks a lot. Appreciate all the color. I was wondering if you could tell us a little bit more about your incentives. I think, Glenn, you mentioned you're running at around 5% right now. I assume that's not including base price reductions. I wanted to get a sense, is that true? And if so, how much base price reductions, you know, just taking an estimate, providing an estimate of how much that might be
spk07: year over year and then also are you are you finding the need to offer what you might call late stage incentives you know as folks come to the closing table hey Steven good question this is Glenn so so far base true base price discounts have been pretty minimal we've barely been focusing on incentives and that's that average of 5% that we're talking about there's been a few select communities where we've taken base price discounts or reduced base price, but it's pretty small in the overall picture. And then for the late stage incentives, Linda, do you want to add some color there?
spk00: Certainly, we really work closely with customers as they're approaching their closing to ensure that they're comfortable and ready to move forward and close on the scheduled date. So we do typically see more of the renegotiation or assistance, additional financing incentives coming in at the late stage. Other incentives are, of course, down up front at the time of the purchase with things like forward commitments.
spk10: And those late stage incentives, to provide a little bit more detail around that, are you saying that those would be things like... rate buy-downs or things of that nature? Is there anything different about those late-stage incentives that we should know about? And then you also talked about specs. I just want to get a sense for how many specs per community in general would you say you target? And how far above that targeted range do you think you might run in the near term?
spk00: So first of all, on those late-stage incentives, it might be, Stephen, an example where We gave closing cost incentives at the time of contract, and we're giving some additional incentive before close to further buy a rate down if the customer didn't already have a long-term lock in place. Or it might be in the form of a design studio credit, as there might have been additional changes in the market from when they originally purchased.
spk09: Yeah, relative to spec, Stephen, we consistently implement strategies. And as we said in the prepared remarks, about 60% of our starts are spec starts. That's largely to fuel the desire from the consumer to have certainty around close. And we're seeing in today's environment, they really are looking for a close date within 30 to 90 days. And so that spec strategy works really well for us. On average, our target is about five specs per community.
spk02: Okay.
spk10: Great.
spk02: Well, that's appreciated. Thanks a lot, guys. Thanks, Stephen.
spk03: Thank you. Our next question comes from the line of Alan Ratner from Zellman and Associates. Please go ahead.
spk06: Hey guys, good morning. Nice execution considering the tough environment out there. My first question, just kind of want to touch on the price versus pace equation. And I know in the past, Doug, you've kind of highlighted to us that push comes to shove. You're going to focus on pace and getting a respectable absorption pace. And When I look at your results this quarter, 5% incentives, 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 you're thinking about that equation today. Are you seeing the elasticity 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?
spk08: Yeah, that's a great question, Alan. You know, we were going into the year with an excellent backlog, as you pointed out, 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 markets, right? I mean, Our operators are incentivized to keep their backlog to get the year-end closings. This has been such a rapid interest rate environment, changing from five to six to seven to six. 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. frankly, some aggressive pricing behavior that really just created some gross activity, but a like amount of cans. So I think as we go into the new end of 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 getting hit on both sides they read every day rates are going up and then they they think well as our price is going down so sometimes the incremental pace you know with additional incentives and base price adjustments don't even do anything so again it's a little bit more art than science but you know we will focus and continue to focus on pace going into the new year and in and with our new communities that we're opening We've got these three new committees we pointed out in Dallas. There's hundreds of people on the interest list going through pre-qualifications right now. They're well positioned, great locations, great price. It's going to be a choppy time, but we're well prepared for it.
spk06: That's very helpful context. Thank you for the comments there. Second question, you know, you guys hosted a 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, you know, 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 23, so it sounds like you're still kind of moving forward with those plans here. Has anything changed about how you're 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 23 and 24 growth outlook a whole lot, given your current land pipeline. So I'm not looking for updated targets there, just more qualitatively, if any of those items you mentioned back in May have changed.
spk08: Well, I think it's changed significantly as far as the macro environment for housing, right? I mean, interest rates have more than doubled for the consumer. It's anybody's guess where the Fed goes with the – it looks like we're going to continue to see rate increases. So, you know, we put together a 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. A number of our communities were purchased to pre-21 as we highlighted in the May Investor Day. Have we pushed those out a little bit? Yes. It's a little bit of that slower execution. We still believe in that growth. We still believe in those communities because they're well positioned in A locations. They're being able to be priced very attractively. as I mentioned, in these communities of Dallas and some, you know, all the other communities we highlighted. So it looks like, Alan, if I was to predict, I think the housing market and starts will pull back dramatically in 23. We're going to, we've already were undersupplied. And I think going into 24, we're going to see a bounce back because there's no supplies. The resale market is effectively locked in at sub 3.5%, 4% mortgages. There's still plenty of millennials and buyers that need housing. A lot of them are on the sidelines. Starting these new communities as we look at them in 23 going into 24, I think could be positioned very well to meet that need going into the latter half of 23 and going into 24. That's the way we're playing it. Cash, though, 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 20s because we also sense there could be opportunities for us to change our market position going through the next 12 to 18 months.
spk06: Very helpful, Doug.
spk02: Thanks for all the thoughts there. Good luck. Thank you.
spk03: Our next question comes from the line of Carl Reichardt from BTIG. Please go ahead.
spk05: Thanks much, everybody. On the 90 to 100 new communities coming, Doug, 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? Effectively, I'm asking, it's a big run in growth. Is that going to change your mix or move you away from the 60% of total start spec long-term, or do these new communities sort of come in at the same historic spec and premium entry-level mix that you've had?
spk09: Yeah, good questions, Carl. This is Tom. I think it's 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 region, which is really at more attainable and affordable price points. So we're really thinking that this community expansion is going to benefit us through the current market environment.
spk08: Yeah, Carl, when you look at the central and east-southeast region, I think we pointed that out back in May. That's a big part of what we have been repositioning to that premium entry level. And as we mentioned in the prepared remarks, our ASP will be coming down because of that change in mix.
spk05: Sure. And 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 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 anything at the mid-end trades now, like rough frame side or rough electrics, things like that? And from a materials perspective, we've heard builders complain about pedestals. Are there any others where you're seeing significant issues in terms of obtaining them, or are we starting to see some improvement on things like windows and doors from your perspective?
spk08: Thanks. Windows have improved. Appliances, in some cases, have not. I would characterize the back end as still a challenge for our teams across the country. My prediction is by the end of the first quarter, the back end will realize that housing sales and starts have pulled back dramatically and they'll be looking for work just like the front end. So we are targeting double digit, we're targeting double digit decreases to our cost structure going into 23. Obviously with these new communities, we're enjoying some of that with the recent lumber drops as well. But it's going to take until the first quarter before the back end realizes that their backlog is not as strong as they thought it would be.
spk02: Great. Thanks, Doug. I appreciate it. Thank you.
spk03: Our next question comes from the line of Alex Reitel from B Reilly. Please go ahead.
spk12: Thank you.
spk02: Thank you.
spk12: Excuse me. Can you quantify the cost reduction actions to date and, you know, maybe talk a little bit about future cost reduction actions to take place?
spk08: Well, as I mentioned earlier... Go ahead, Tom.
spk09: Go ahead, Doug. No, you go ahead.
spk08: You know, we're targeting from end of this year to the end of next year a double-digit price reduction strategy. So we're still in the early stages of that. So it's it's it's a little early to quantify it, but that that's the quanta.
spk09: We just quantified what we're targeting across the country for the I was going to add obviously that is Occurring with with rebidding certainly it's occurring as we're looking at new projects coming forward and focusing on on trades and that have more availability. Certainly a big 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 re-looking at all new product types coming into the market, looking at value enhancement, value engineering on all those products to ensure we're producing the lowest cost structure possible.
spk12: And then as it relates to the spec strategy with a target of about five per community, is that finished or under development, and where did you stand coming out of third quarter?
spk09: Yeah, Alex, that is for in-process specs. Standing at the end of the third quarter, we ended right around 100 completed units, which was less than one per community.
spk02: Thank you. Thank you.
spk03: Our next question comes from the line of Jay McCanlis from Bedbush. Please go ahead.
spk01: Hey, thanks for taking my questions. The first one I had, when we think about the ASP going into 23, is it going to have more of a, call it a mid-6s type feel, or is it still going to be low 7s? Any help you can give us on that?
spk07: Well, it depends on kind of the pricing environment going into next year, Jay, but Where we sit today, I think you'll see it in the sixes probably, you know, mid to high sixes is kind of the best range to think about where we sit today.
spk01: And then I think Tom talked earlier about lumber prices coming down. I guess when should we expect that to be a tailwind for gross margins?
spk09: Yeah, the lumber prices we've seen over the last couple of quarters have been the lowest in years for sure. And so you'll start seeing that coming through margin in the first half of next year.
spk01: And then just the other question I had, it sounds like you guys may be resetting some of the base pricing as you're opening the newer communities. Any sense of what the new price is relative to the old price you may have underwritten it at? Is it 5% lower, 10% lower? Just trying to get a sense of how much you're having to work on base pricing to drive affordability.
spk09: Yeah, Jay, that's a great question. And 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 you're going to be looking at price discovery that's in the 5% to 20% range is our best estimate right now.
spk07: And in some cases, Jay, it actually still may be above underwriting because it was underwritten two or three years ago, but below where we thought it was going to be a couple months ago, right, or six months ago. So it depends on when the community was underwritten, too.
spk01: Great. That's all I had. Thanks for taking my questions.
spk03: Thank you. Our next question comes from the line of Truman Patterson from Wolf Research. Please go ahead.
spk11: Hey, good morning, guys. Thanks for taking my questions. First question, you know, 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 you're seeing the highest level of incentives potentially quantify some of those regions.
spk00: Sure, Truman. This is Linda. Certainly, incentives have increased during the quarter in line with the increase in interest rates and levels of consumer confidence. Generally, we're certainly seeing that all markets and all buyer segments are impacted by rapidly increasing rates. So it would be difficult to say that there was any one particular market where there was a greater level of incentive. It is very much community by community, depending on the level of competitive supply in the market, what stage construction is at in particular communities for unsold spec homes. But in general, at some point, as Doug said earlier, we can only go so far with incentives and the levels that we could buy interest rates down to. So at that point, we would also be looking at layering in base price changes, as we discussed.
spk11: Okay. Okay. Thanks for that. And then, Doug, you know, you mentioned earlier in Q&A that you're expecting the housing market, you know, will pull back dramatically in 2023. You know, given the widespread in mortgage rates versus the 10-year treasuries, if mortgage rates, you know, settled, let's just say around the 6% level in 2023, does that really change your thinking? much or has kind of a negative buyer psychology permeated where your view doesn't change that much? I'm just trying to understand the potential elasticity of buyer demand.
spk08: I think when you look at the cancellation activity and the reasonings for cancellation, Linda, I would say it's due highly psychologically more than then 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 a little bit disrupted because they're reading on one hand How far do rates go, dear? And then on the other hand, where do prices go? The spread to the mortgage market right now, by the way, and I'm sure you're 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 REITs out there. And so there's a higher risk premium, right, to what's going on in the mortgage markets. And some of those mortgage REITs 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 then engage into the housing cycle. And housing is the tip of the spear for the economy, right? I mean, we have a significant multiplier effect. And if housing starts to go down double-digit fashion next year, that's going to have a significant impact on the economy, which is where we're trending. So 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.
spk11: All right. Well, thanks for the time, and good luck in the coming quarter.
spk02: Thanks, Ruman.
spk03: Thank you. Our next question comes from the line of Alex Barron.
spk04: from housing research center please go ahead yeah thanks gentlemen um um can you guys provide the starts for the quarter and versus last year um just curious about that starts for the quarter was around 900 alex and compared to the last quarter was
spk09: I don't have that in front of me. We're down about 65% from the prior, the second quarter. Yeah, sequentially. So we've cut back on starts quite a bit. Obviously, we have a significant number of in-process, and it is our goal to balance our absorption pace and our start pace.
spk04: Okay, that's good. And then... I guess, 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, say, 200 basis points, or it's not quite that far?
spk00: Yes, Alex, this is Linda. Certainly as rates increase, it gets harder to buy them down substantially and becomes more expensive to do so. And then we also will have seller concession limits based on the loan type, where there's a limit to how much we could contribute in closing costs for the buyer. So that's when we can still use some things like temporary rate buy-downs that could get you a lower initial rate. The buyers are still qualifying at the note rate. But there is interest in that as well as some growing interest in ARMs, especially in the jumbo area.
spk04: Yeah, okay. So I was just trying to get a sense of rates are 7%. Is it possible to buy them down to 5% or is that too extreme? In other words, if you can't,
spk00: Yes, at 7%, we can still buy down to about five and a quarter, and we can still provide some additional incentives for paid closing costs. So yes, there is still room to do that. In today's market, it's getting more challenging to get rates into the fours. And we could really only get there with some things like products or temporary buy downs.
spk09: And Alex, I'd just add that the longer the term that you're 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.
spk04: Right. So related to that, what is right now your average build time and what's the range? Which are the best markets with the shorter build times? Which are the markets with the longest build times?
spk09: Yeah, quarter over quarter, we're kind of flat on our cycle times right now. Year over year, we're probably a couple 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.
spk08: On average, Alex, this is Doug, our company's construction start to completion time is around seven months.
spk04: 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 those longer built time markets to be able to do that Well, that's it's a good question.
spk08: And so we're focused on two strategies there one is to maintain a Healthy spec level as we mentioned in a call sixty percent of our starts our spec and where we have a higher demand communities a we may push that, we will push that button even further. The other things that we're looking at going into 23 is to shorten those cycle times. Hopefully we can bring those in by a month or so, so that'll help create that certainty that we were talking about and what you're asking about. So a combination of those factors will definitely help in the grand scheme of things.
spk04: Sorry to ask one more, but if I could, So on that front, let's take the market like Phoenix. Is there any, I know historically yourselves and other builders have outsourced most of the labor. So is there any possibility to maybe consider changing that and bringing some people on your staff that would help shorten that cycle time rather than depend on outside subcontractors?
spk08: My personal opinion is no. I think 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 that I like reading, there's going to be an excess labor market, and the subs will, and we've already seen it 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 of next year.
spk02: Got it. Thanks a lot. Best of luck, guys. Thanks.
spk03: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And now I would like to turn the conference over to Mr. Doug Bauer for closing comments.
spk08: 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.
spk03: Thank you. The conference of TriPoint Homes has now concluded. Thank you for your participation. You may now disconnect your lines.
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