Cut prices by 20% and they will come: Homebuilder Meritage explains new era after sales orders fall by 46%

Cutting construction costs by “aggressively rebidding” projects, and “walking away” from land deals: In the official’s own words.

By wolf richter For wolf street,

Meritage Homes, which specializes in building entry-level homes, reported Q4 Income on Thursday. In terms of revenue and earnings, they are working through their backlog.

But year-over-year sales order volume fell 46% in Q4 to just 1,808 homes. In dollar terms, sales order volume fell 52% to $704 million.

Orders were affected by “weak overall demand,” he said during the conference call, and because customers canceled 39% of their contracts, which was higher than the 12% cancellation rate in the fourth quarter of 2021.

and there was a dramatic decline in the average selling price (ASP) of homes ordered In Q4. The ASP for orders fell “20%” or “about 20%” from the peak as they made it (actually -19%), from $480,000 in Q2 to $389,000 in Q4.

These sales orders are not yet included in revenue – only closed sales are included. But those that don’t get canceled will reflect in revenue when the deliveries and sales of the homes close.

According to executives on the conference call, this decline in average selling price (ASP) for orders was not due to a change in the mix of homes sold, such as more low-end homes in the sales order mix, but due to a decrease in sales order volume. Actual price reductions, mortgage rate locks and mortgage-rate buyouts to revive.

20% reduction in prices causes sales order volume to increase again,

“Our position is that we are an affordable builder,” CEO Philip Lord said during the earnings call. looking for alpha, “We want to get a payment that makes sense for our customers.”

“We have taken additional action to get back on our [sales] Target, which includes reducing prices and using a full range of incentives such as mortgage rate locks and rate buydowns, until we find a market clearing point to move our inventory and return to our target sales pace There are,” Lord said.

CFO Hilla Sferuza said: “We are comfortable on our current pricing structure. We are about 20% below peak and we have been able to drive sales at an acceptable pace. So we don’t feel we need to increase further at this point in time.” However, we are constantly in sync with the market conditions.

He said January sales order volume is up from the fourth quarter and shows that the 20% reduction in ASPs has worked to boost sales. The company gave guidance for Q1 based on sales in January, but withheld guidance for the rest of the year due to “limited visibility and market conditions.”

at normal market conditions.

“We’re not sure the market is obviously better, other than the fact that it’s spring and not winter, and interest rates are somewhat stable,” Lord said.

“Today’s higher mortgage interest rates continue to pressure housing prices as monthly payments still remain above 2020 and 2021 levels,” said Steve Hilton, executive chairman.

“We believe that home sales activity will remain volatile until rates stabilize,” Hilton said.

“We see some potential buyers who may qualify but are waiting for further price drop as they anticipate that additional builder incentives are coming,” he said.

“Other existing buyers who have rate locks or are below current market mortgage rates were canceling due to buyer’s hesitation because they were nervous about the general economy or their financial situation,” he added.

Reducing manufacturing costs through “aggressive rebidding” and “simplification of the product”.

How can a builder cut their average selling price per order by 20% even though their sales orders have dropped 46%, and when their overall margin is just north of 20%?

“We expect the continuation of financing incentives for price concessions, higher discounts, and rate locks and [mortgage rate] The buydown will negatively impact gross margin in 2023,” CFO Sferruzza explained. So that’s it.

Lord explained, “Our purchasing team is actively reengineering our vertical costs to capture cost savings as incremental efficiencies are added within our supply chain.” “We are pursuing cost savings across all cost categories in all of our markets this year.”

“We are going through a whole rebuilding effort at the moment,” Lord said. “We are aggressively renovating all of our communities for the start of spring. To the extent that we can, we’re holding off on really renovating some of the newer communities to get to our vertical costs.

In addition, some cost savings are due to “some increased efficiencies and simplification of the product”.

“We have seen in some of the hardest hit markets that we have recovered over $15,000 per home [in construction costs] Which, on a $200,000 production budget, you can do the math,” Lord said.

“Where we’ve made the most meaningful [price cuts]in Phoenix and Denver, where we also saw the most meaningful direct cost savings, which drove our margins,” he said.

“When we quoted earlier in our script that we get $15,000 per home, that’s in Colorado and Phoenix… where the market has adjusted the most, and where prices have increased the most over the last three years,” Lord he said.

“walking away” from land deals,

“This quarter, we continue to right-size our land portfolio, walking away from underperforming land deals or recently concluded deals where we could not secure closing extensions,” Spruza said. In Q4, the builder released about 3,700 lots and booked write-offs of $4.2 million, he said.

But the builder still ended up with 4.5 years of supply within its target of 4 to 5 years. “So we are comfortable that we have the amount of land we need right now,” he said.

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