PulteGroup (NYSE:PHM) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
PulteGroup delivered almost 7,000 homes in Q3, with a strong gross margin of 24.8% and net income of $476 million, or $2.53 per share.
The company is experiencing a slowdown in home buying demand due to higher interest rates, affecting traffic and sales, particularly among first-time buyers.
PulteGroup’s backlog increased to 10,298 homes valued at $6.4 billion, despite a 6% decrease in net new orders compared to the previous year.
The company invested $1.3 billion in land acquisition and development in Q3, with a focus on maintaining a strong land pipeline and managing production to align with demand.
Future guidance includes expectations of closing between 7,000 and 7,500 homes in Q4, with a full-year gross margin anticipated to be between 24.5% and 25.0%.
Full Transcript
OPERATOR
Jim Zeumer, Vice President, please go ahead.
Jim Zeumer (Vice President, Investor Relations and Corporate Communications)
Thank you, Erica, and good morning. I want to thank you for joining today’s call as we look forward to discussing PulteGroup’s third quarter operating and financial results. On today’s call, I’m joined by Ryan Marshall, President and CEO; Jim Ossowski, Executive Vice President and CFO; and David Carrier, Senior Vice President, Finance. A copy of our earnings release and this morning’s presentation have been posted to our corporate website at pultegroup.com. We’ll also post an audio replay of this call later today.
I would highlight that today’s presentation includes forward-looking statements about the company’s expected future performance. Actual results could differ materially from those suggested by our comments today. The most significant risk factors that could affect future results are summarized as part of today’s earnings release and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.
Now let me turn the call over to Ryan.
Ryan Marshall (President and CEO)
Thanks, Jim, and good morning. I’m very proud of the business results our organization has delivered thus far. 2026 in a world where we can’t control global events or macroeconomic conditions, we can manage how we respond to the operating environment. To that end, I think PulteGroup continues to do an excellent job navigating today’s evolving market dynamics and doing so in a way that is consistent with our long-term operating strategies. We continued this approach in the third quarter as we remain disciplined in our business practices and focused on delivering an outstanding home buying experience within a period that underwent meaningful change to the former. In the third quarter we delivered almost 7,000 homes, maintained our focus on delivering strong gross margins and overall solid returns while increasing our backlog and returning nearly $400 million back to our shareholders.
As to the latter, consistent with all the reporting and commentary swirling around the current state of the U.S. housing industry, we experienced a notable slowdown in home buying demand as we moved through the third quarter and interest rates surged higher. The reality that buyer demand slowed through the quarter won’t be news to anyone on this call. What I think is interesting, however, is exactly how buyers responded. Based on feedback from our sales associates in the third quarter, they were routinely working through these important customer issues. Buyers are spending more time getting comfortable with the higher monthly payments, interest rates and financing options before moving forward. The need to sell an existing home remains one of the most significant conversion barriers.
Buyers have clear expectations regarding lot characteristics, home functionality and overall fitness. In other words, they are taking advantage of market conditions to be very particular in what they’re willing to pay for. And finally, timing often appears to be a symptom rather than the true obstacle. In many conversations, our sense is that not ready yet is really about financing or existing home sale readiness rather than timing itself. The most interesting point with these comments, they really haven’t changed very much from earlier in the year when interest rates initially started moving higher. Prospective buyers continue to have concerns about stretched affordability, high monthly payments and home sale contingencies. Our sales teams were able to help buyers solve these challenges, such that our conversion rates in the third quarter were comparable to the first two quarters of 2026.
So if the buyer issues haven’t changed and we’re still able to convert prospects at a similar rate, why the meaningful deceleration in reported sales? What changed in the quarter, and most notably in September, is that the big move higher in interest rates along with inflation, global tensions and waning confidence reached the point where more consumers simply put their search on pause. In the third quarter, our customer conversion rates were relatively stable, but traffic to our communities was down 14% from the prior year and on a sequential basis down 11% from the second quarter. These conditions have continued through the first few weeks of October. As you would expect, most of the missing traffic were first-time buyers as this group remains the most impacted by higher interest rates. Not only did this pronounced slowdown among our first-time buyers impact our third quarter signups, but it also directly impacted our closing volumes for the quarter as the majority of our spec sales are within our first-time buyer communities.
We have done a great job controlling starts and in turn spec inventory, but the impact of having fewer finished spec sales reduced our home closings in the third quarter. I fully appreciate that this isn’t a very upbeat message for an earnings call, but it’s important to acknowledge the change in the market conditions over the past 30 to 45 days when discussing PulteGroup’s results for the quarter and the year to date. Consistent with previous quarters, in the third quarter we focused on serving what we consider core home buying demand rather than chasing volume in a market showing little price elasticity.
You can see this in PulteGroup’s reported Q3 financial results, as closings came in slightly below our guide, but a strong reported gross margin of 24.8% helped the company to deliver earnings of $476 million, or $2.53 per share. Through the first nine months of 2026, PulteGroup delivered just shy of 20,000 homes and generated $11 billion of home sale revenues. Operating within this year’s more competitive market conditions, we have appropriately managed price and pace to capture sales while driving year-to-date gross margins and operating margins of 24.7% and 14.2% respectively. In alignment with our capital allocation priorities, our strong nine-month financial results supported investment of $4 billion into land acquisition and development and the return of $1.2 billion to shareholders through share repurchases and dividends.
I’ll provide more detail on how we’re navigating current demand dynamics later, but first let me turn the call over to Jim Ossowski for a detailed review of PulteGroup’s third quarter financial performance.
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Thank you, Ryan, and good morning. In what was a challenging quarter for U.S. housing, our financial results once again show the value of our more diversified and balanced operating platform. Let’s get started. Our net new orders in the third quarter totaled 6,208 homes, which is a decrease of 6% from the third quarter of last year. Reflective of Ryan’s comments about lower consumer traffic, the decrease in Q3 net new orders was driven by a 13% decrease in absorption pace, partially offset by a 7% increase in average community count of 1,077 for the quarter. In the third quarter, our cancellation rate as a percentage of starting backlog was 10%, which is down from 12% last year and down 50 basis points from Q2 of this year.
Even in today’s dynamic demand environment, these relatively stable cancellation rates suggest that customers under contract remain committed to closing on their home. Our absorption pace for the third quarter was 1.9 homes per month, which compares with an absorption pace of 2.2 homes per month last year. Absorption pace was lowest in September as interest rates surged higher throughout the month. Our lower absorption pace is a consequence of the drop in prospective buyer traffic to PulteGroup communities. By buyer group, net new orders in the third quarter among first-time and move-up buyers were down 9% and 14% respectively from last year.
Once again we benefited from our leadership position serving active adult consumers, as Q3 signups among those buyers were up 11% over last year. The slower sales among move-up buyers reflect in part ongoing weakness within this buyer group and our Texas and West operations. Within our active adult business, we continue to benefit from our prior year land investments as the increase in net new orders was a result of ongoing community count growth. Over the past five years we have grown our active adult community count by almost 20% and we look to increase market share even further with the ongoing rollout of our new Explore by Del Webb brand, PulteGroup’s third quarter home sale revenues totaled $3.9 billion, which is down 9% from last year’s third quarter revenues of $4.2 billion. Lower revenues for the quarter were primarily the result of a 9% decrease in closing volumes. The 6,876 homes Q3 closing volumes were negatively impacted by rising interest rates and reduced consumer confidence, as we sold a fewer number of spec homes that we were expecting to sell and close within the period.
Third quarter closings break down as follows: first-time and move-up were both 38%, while active adult accounted for 24% of closings in the period. Closings in the third quarter of 2025 were comprised of 39% first-time, 39% move-up, and 22% active adult. On a year-over-year basis, third quarter backlog was higher in both units and value. We ended this year’s third quarter with a backlog of 10,298 homes valued at $6.4 billion compared with prior year backlog of 9,888 homes with a value of $6.2 billion. At the end of the third quarter, we had 14,599 homes in production, of which 6,627, or 45%, were spec homes. Our divisions have done an excellent job managing production as total specs are down 10% from the same period last year, while finished specs are down 16% from last year.
The 1,696 is an average of 1.6 finished spec homes per community. While our current spec inventory level is right-sized, we continue to tightly control our starts pace to align production with changing demand dynamics. In the third quarter, we started just over 6,500 homes during a period in which we sold 6,200 houses. Based on backlog, homes under construction, and recent trends in the pace of spec sales, we now expect to close between 7,000 and 7,500 homes in the fourth quarter.
We still have to sell and close a number of spec homes to achieve the guide, so we’ll be closely assessing buyer demand and taking the appropriate steps needed to convert spec inventory into closings. Further, given the expected Q4 closings, we now anticipate full-year closings to be in the range of 27,000 to 27,500 homes. Based on the mix of homes we anticipate closing in the fourth quarter, we are still guiding our average sales price on closings to be in the range of $550,000 to $560,000 in the fourth quarter and for the full year. Based on prior year land investments, we came into 2026 expecting year-over-year community count growth of 3% to 5% for each quarter, but our average Q3 community count of 1,077 was up 7% over last year. The higher growth rate realized in Q3 reflects the slower closeout of existing communities in the period.
We are still forecasting year-over-year community count growth of 3% to 5% in the fourth quarter, but fewer community closeouts in the period could again elevate the percentage growth rate. Consistent with our previous guidance, our reported third quarter gross margin was 24.8%, which is down 140 basis points from last year and down 20 basis points sequentially from Q2 of this year. Our reported third quarter gross margin is inclusive of incentives of 10.4% as well as $26 million, or 70 basis points, of land impairment charges recorded in the period.
In the comparable prior year period, incentives were 8.9%, and we recorded $17 million of land impairments. On a positive note, our national and divisional procurement teams continue to do an excellent job working with our trades and product suppliers to manage construction costs. PulteGroup’s third quarter build costs were $75 per square foot, which is down 5% from last year and flat with the second quarter of 2026. Taking into consideration our backlog, current demand conditions, competitive market dynamics, and the need to cycle through existing spec inventory, we expect fourth quarter gross margins to be in the range of 24.0% to 24.5%.
Given our Q4 margin guide, we are maintaining our guidance for full-year gross margin to be in the range of 24.5% to 25.0%. SG&A expense for the third quarter was $397 million, or 10.3% of home sale revenues. In Q3 of last year, SG&A expense was $401 million, or 9.4% of home sale revenues. With higher interest rates pressuring consumer demand and the potential that rates remain elevated for longer, we remain focused on controlling overhead expenses while still delivering superior build quality and an outstanding home buying experience. Still, given our updated forecast for fewer closings this year, we now expect full-year 2026 SG&A expense to be in the range of 10.3% to 10.5% of home sale revenues.
Our financial services operations reported third quarter pre-tax income of $46 million, which is up slightly from last year’s pre-tax income of $44 million. Mortgage capture rate in this year’s third quarter was 85% compared with 84% last year. PulteGroup’s reported pre-tax income for the third quarter was $625 million, and our tax expense for the period was $149 million, or an effective tax rate of 23.9%. Our effective tax rate benefited from energy tax credits recorded in Q3.
For the fourth quarter, we expect our tax rate to be approximately 24.5%, assuming no discrete period-specific tax events. Q3 reported net income was $476 million, or $2.53 per share. In the third quarter of 2025, we reported net income of $586 million, or $2.96 per share. PulteGroup’s Q3 earnings per share was calculated based on 188 million diluted shares, which was down 5% from the prior year. As we continue to allocate capital to systematically repurchase outstanding shares, in Q3 of this year we repurchased 2.8 million common shares for $350 million for an average price of $124.70 per share.
Over the first nine months of 2026, we repurchased 8.4 million common shares for $1 billion for an average price of $123.51 per share. While market conditions can make underwriting land transactions more difficult, we were successful in investing $1.3 billion in land acquisition and development in the third quarter, of which 51% was for the development of our existing land assets. Year to date, we have invested $4 billion in land acquisition and development. We now expect to invest approximately $5.3 billion in land for all of 2026. Inclusive of land transactions completed in the period, we ended Q3 with approximately 224,000 lots under control.
Total lots under control are down 16,000 from the third quarter of last year and down 4,000 lots sequentially from Q2 of this year. We continue to underwrite new land deals, but we are also walking away from select option transactions that may no longer meet risk-adjusted return thresholds. In the third quarter, we elected to walk away from approximately 8,000 lots previously held under option. As we have discussed on prior calls, we view lot options as a tool to both improve project returns and to help mitigate market risk.
One without the other really provides PulteGroup with limited, if any, value. Reflecting on our differentiated approach to the lot options, at the end of Q3 over 85% of PulteGroup’s land options were with underlying land sellers. The rest of our options are structured as one-off transactions with a select number of land bankers. At the end of the quarter, we had 55% of our lots held under option. Lastly, when it comes to optioning dirt, we continue to solve for the best business outcome on a deal-by-deal basis rather than simply targeting an option lot percentage.
Given our operating results for the first nine months of 2026, we still expect the operating cash flow generation for the full year to be approximately $1 billion. And finally, we ended Q3 with $1.4 billion of cash and a debt-to-capital ratio of 12.1%. Adjusting for the cash balance, our net debt-to-capital ratio at quarter end was 3%. Now let me turn the call back to Ryan for some final comments.
Ryan Marshall (President and CEO)
Thanks, Jim. This latest increase in interest rates has forced more consumers to the sidelines and worked to make overall operating conditions more challenging. While higher rates made demand conditions in the third quarter generally more competitive throughout the country, our geographic diversity again proved incredibly valuable in the third quarter. We continue to see outperformance in our Florida operations and key markets in the Midwest. Better performance in these markets helped to offset softer demand in other areas of the country, including markets in the Southeast, and ongoing weakness out West.
Looking beyond the quarterly earnings, I believe in the fundamental strength of long-term housing demand, and across all the generations and populations, the desire for homeownership remains as high as ever as the financial and emotional underpinnings are too compelling to ignore. I also believe that after months of mortgage rates above 7%, consumers could view even a modest pullback in interest rates as reason enough to reengage in the home buying process.
Although I acknowledge that it may take more than just a move lower in interest rates, as consumer confidence is weighed down by rising fuel costs and fears about ongoing inflation and conflict in the Middle East. While a quick reacceleration in home buying activity is certainly possible, the reality is that higher interest rates pressured industry-wide new home sales in September, and the potential for interest rates to stay higher for longer is clearly present.
As such, I think it’s helpful to discuss how we’re assessing market opportunities and challenges. First, our diversified operating platform offers tremendous advantages as we can capitalize on the stronger markets and consumer groups to help offset any weakness in other parts of the business. Second, consistent with our demonstrated operating practices, we remain focused on serving core demand rather than shedding margins in pursuit of less profitable, low-returning volumes.
Obviously, we must turn assets. But sometimes lowering price doesn’t generate incremental sales. Rather, it just makes all your home sales less profitable. Third, we have a robust and well-structured land pipeline. We are on track to invest $5.3 billion in land acquisition and development this year. If conditions warrant, we are fully prepared to reduce land spend in 2027. Further, given the very intentional way we have structured our controlled lot positions, we can and will walk away from option lots that no longer meet return hurdles.
And finally, PulteGroup’s balance sheet provides tremendous strength and financial flexibility. With $1.4 billion in cash and net debt to capital of only 3%, not only can we weather tough times, but we can capitalize on market opportunities should they develop. Last week, we had our quarterly operations reviews with my senior team, along with our four area presidents and the President of Pulte Financial Services. Beyond just reviewing Q3 results, the field leaders had already developed action plans and, where appropriate, are already taking steps to respond to the changing market dynamics. I can’t overestimate the value of having an experienced leadership team that can quickly assess and adjust. I want to thank them and the entire PulteGroup organization for the operating and financial success they delivered in the third quarter and for their efforts to ensure our company’s success going forward.
Now let me turn the call over to Jim Zeumer.
Jim Zeumer (Vice President, Investor Relations and Corporate Communications)
Great. Thanks, Ryan. We’re now prepared to open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Erica, we’re prepared to start Q&A.
OPERATOR
We will now begin the question-and-answer session. As a reminder, if you would like to ask a question, please press star one. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Alan Ratner with Zelman. Your line is open. Please go ahead.
Alan Ratner (Analyst)
Hey guys, good morning. Thanks for all the detail, and nice job in a tough market. Appreciate the color on the traffic during the quarter. I was hoping to dig in a little bit more on some price point trends that you’re seeing. Recognizing that both move-up and active adult, I think, have been relative outperformers for quite a while now, did you see the same magnitude of traffic pullback at those price points, or are you seeing maybe differences in behavior between, you know, the move-up and active adult buyers versus entry-level right now, given the recent rate move?
Ryan Marshall (President and CEO)
Yeah. Alan, good morning. Thanks for the question. Definitely all buyer groups felt it, but the first-time, it was outsized impact there. So I don’t think any buyer group is totally immune, but the move-up and the active adult certainly fared better, especially given a lot of those buyers in our world pay cash. They’re less rate sensitive than the first-time buyers which, you know, largely 100% need a 30-year mortgage or some kind of mortgage.
Alan Ratner (Analyst)
Makes sense. And then, on the gross margin guide, you know, obviously a little bit of pressure sequentially, but not much. And I’m curious, with incentives flat on closings, can you talk a little bit about what you’re doing on orders right now and ultimately how high are you willing to take that number if rates don’t pull back at all in the next, you know, spring selling season? Or how should we think about just the price versus volume in play next year?
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Yeah, Alan, I think the way I’d address that is we really—and we tried to address it in our prepared remarks—that we’re seeing inelasticity in price right now. And so a lot of incremental discount above and beyond where we’re at doesn’t necessarily generate a whole bunch of incremental sales that creates economic benefit from the incremental sales. We definitely do focus on inventory turn, and it’s a critical component of how we operate. So, you know, there is a point at which you say, well, we have to kind of lean in more in order to turn inventory, but we’re quite a bit above those levels. So with that in mind, we’re really looking at, if we’re going to lean in with more incentives, does it truly generate incremental sales volume? And if the answer is no, we think the much better economic outcome for our company and our shareholder is to kind of stay in the ballpark that we are right now.
We certainly benefited—our margins certainly benefited—in the most recent quarter because we sold less spec, and generally that spec and final spec inventory is where there are higher incentives. So a little bit of a double-edged sword in the third quarter: the less spec inventory sales helped margin, but it hurt us on the volume side. As we move into the fourth quarter, we factored in some of the incremental discounts that we’d expect to give on the spec inventory, and that’s all baked into the margin guide that we’ve given for the quarter and the full year.
Alan Ratner (Analyst)
Great. Appreciate all the detail. Thanks a lot.
OPERATOR
Your next question comes from the line of John Lavallo with UBS. Your line is open. Please go ahead.
John Lavallo (Analyst)
Good morning, guys. Thanks for taking my questions as well. The first one is, you know, several of—or two of—your competitors had talked about a little bit of incremental pressure from the existing home market as folks were willing to be a little bit more competitive on pricing after, you know, waiting for three or four years to sell. Curious if this had an impact on your move-up segment in particular, and then maybe conversely, if this did in fact happen, is this a positive in the sense that it sort of restarts the flywheel on the housing value chain?
It could actually result in a better year as we move forward, perhaps.
Ryan Marshall (President and CEO)
John, I think there’s a few anecdotal markets where maybe you saw some movement in price, but the environment that we’ve been living in—and we continue to live in—is that pricing between new and resale is almost on top of one another. And in fact, in some cases resale is more expensive than new, which is a phenomenon that I don’t think we’ve seen often in the 25 years that I’ve been in this business. So I don’t know that I would necessarily 100% agree that we’ve seen a big unlock in resale pricing going lower.
I do agree with you that the resale market freeing up does restart the flywheel, and that’s been a consistent comment that we’ve been making for the better part of a year and a half. The thing I would comment on—and I touched on it, so did Jim—one of the biggest impediments that we’re seeing right now is that our move-up and active adult buyers need to sell their existing home. And that is tough. And part of the reason it’s tough is because the prospective buyer that’s going to buy their home is faced with a 7.5% interest rate, and they don’t have the ability to tap into the buy-down mortgage rate like we can offer.
So there’s definitely some headwinds out there as it relates to the resale market and the new home market that is largely centered around 7.5% interest rates. We can certainly address some of that—we are with our buy-down rate—but it’s hard to reach over the fence and help address the challenge on the resale side.
John Lavallo (Analyst)
Yeah, that’s helpful. And I’m curious what you guys experienced on the stick-and-brick and labor cost side during the quarter. What’s your expectation also as we move into the fourth quarter?
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Yeah, we’re really pleased with where we’re at. This is the third quarter in a row that we’ve seen our sticks and bricks are down 5% on a year-over-year basis. So, you know, as we look at it, the teams are doing a great job and would continue to expect that we can bring costs down year over year in low single digits again in the fourth quarter.
John Lavallo (Analyst)
Okay, fantastic.
OPERATOR
Thank you. Your next question comes from the line of Stephen King with Evercore ISI. Your line is open. Please go ahead.
Stephen King (Analyst)
Yeah, thanks very much, guys. Appreciate all the color. Was wondering if you could talk a little bit about the SG&A. I know that that was something that last quarter folks were kind of wondering how you were going to hit your guide for the year. I understand that obviously slower sales and all that certainly creates leverage issues, but your SG&A this quarter actually exceeded us in actual dollars even though the revenues were a little lower. So I just wanted to know, was there anything that was unexpected to you in terms of something that actually caused you to incur greater SG&A dollars than you expected this quarter?
And as you look ahead, I’m curious if your increased guidance assumes maybe something different than you had previously thought about—maybe the mix of homes, like high-end homes, I’m thinking out in the West or something like that—which creates deleverage issues for you in the fourth quarter.
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Hey Stephen, great question. You know, SG&A is something we look at all the time. Really, as we look at the third quarter—you’re right—as absorption slows and volume has come down, we’ve really run into a couple things. One, some of our communities are hanging around longer than we thought, so some of those that are taking longer to close out, we’ve got costs on that. You nailed it: at lower absorption paces—whether you’re selling three homes a month in a community or two homes a month in the community—you still have to staff it the exact same way.
So, you know, when we factored in the guide, we looked at where it’s at, we looked at our volume that we lowered for the course of the year, and we really don’t have anything noteworthy that we need to change course on. It’s just more of a realization of it. As communities are hanging around longer and absorption paces have come down, we’ve lost some leverage in the business.
Stephen King (Analyst)
If I could ask a follow-up, still staying on the SG&A, Jim, we are seeing that you’re performing obviously better on the active adult, but the entry-level as well as the move-up, maybe it’s more challenging. I’m curious, is there a mix issue as well that we should be thinking about for your SG&A? For instance, does your active adult business carry with it maybe a little bit of a higher SG&A load partially offset by higher gross margin, or is there anything like that?
I mean, I generally think higher-priced homes have less SG&A as a percent—in other words, better SG&A leverage—but maybe if you can just speak to how mix can affect SG&A.
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Yeah. I would tell you, Stephen, we really don’t see across our different consumer groups a different mix of SG&A. You’re right, if you’re at a higher ASP level, you probably get better leverage out of it. But again, when you look at the absorptions—you know, we quoted they were off 13% for the quarter—we’re still staffing the same level in our communities from a construction to sales standpoint. But as you lose that leverage, that’s really the headwind that we’re fighting against this year.
Ryan Marshall (President and CEO)
Steven, the only other thing—with our Del Webb communities, they tend to be bigger, they have bigger sales centers, they have more models, but you do a lot more volume out of those communities as well. So to Jim’s point, the way we run our businesses and the way the management teams are set up, there’s really no difference between a Webb community and a first-time Centex community in terms of the overhead dollars that are spent in order to run a community.
Stephen King (Analyst)
Gotcha. Okay, thanks very much, guys. Appreciate.
OPERATOR
Your next question comes from the line of Matthew Bouley with Barclays. Your line is open. Please go ahead.
Matthew Bouley (Analyst)
Morning everyone. Thanks for taking the question. So on the gross margin, the Q4 gross margin—you mentioned market conditions and kind of needing to clear out existing spec and sort of the incentives required to do that. How much of that Q4 margin guide is specifically related to those two issues—the greater spec mix and the incentives required to clear out that? My question is really, is there an implication that if you are successful in kind of clearing out that spec in Q4, could that headwind actually lessen a little bit into 2027?
And obviously the rest is dependent on market conditions. Just trying to think about what does and doesn’t persist as we get into 27. Thank you.
Ryan Marshall (President and CEO)
Yeah. Hey, Matt, I just, you know, maybe clarify one thing. There’s not, we don’t have a spec problem. Our spec inventory is kind of right where we wanted it to be. And, and so we actually had less spec clothing that came through in the third quarter than we would have expected. And so we did get a benefit above the guide. Our Q4 margins, you know, we’ve, I think, adjusted for the reality that we’re in and we’ve, we’ve mixed in stuff that’s in backlog stuff that was dirt sales, stuff that sold a spec in process, and then things that we would expect to sell and close during the quarter as a spec home, which typically come with lower gross margins and, and higher discounts.
Your question about what does that mean for next year? You know, I think it’s going to kind of come down to do you have a change in mix between dirt to be built and spec? We’ve been, you know, fairly vocal and open to say we’re moving kind of transitioning the business back to more dirt sales. And it’s, it’s, you know, we’ve said we’d hope to get it accomplished by the end of 2027. We were on track to do that. You know, market’s gotten a little bit tougher, but we’d still expect to be back to a kind of optimal mix of 60% dirt sale, 40% spec.
You know, if all things being equal, that would have a favorable outcome in terms of margin. Just because our highest margins come on homes that we sell as dirt. If, if that all kind of holds together.
Matthew Bouley (Analyst)
Got it. No, yeah, no, that’s, that’s really helpful. Thank you for that, Ryan. And secondly, just on production, you know, it looked like you started more homes than you sold in Q3. Was that always the plan or just more of a function of how sort of quickly the market conditions changed going forward? You know, how would you think about kind of balancing starts and sales and sort of further reducing inventory from here? Thank you.
Ryan Marshall (President and CEO)
Yeah, Matt, it’s entirely a function of how quickly the market turned and specifically in September. So, you know, as you, I’m sure you can appreciate, we submit for permits in August for homes that are going to start in September. So kind of the ball’s in motion and rolling on those things. And because there is such a leg down on sign up and sign up activity in September, you know, we’re, we’re a few hundred units out of balance from kind of perfectly matched starts to sales.
Matthew Bouley (Analyst)
Got it. Well, thanks guys. Good luck.
OPERATOR
Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open. Please go ahead.
Mike Dahl (Analyst)
Morning. Thanks for taking my questions. Ryan, just sticking with the fourth quarter dynamic and the specs, can you just help us understand within the closings guide you mentioned, you have to, you know, sell and close the number of specs to hit that. What is that ratio of specs assumed that assumed in the 4Q closings guide that still need to be sold. And how does that compare to the most recent periods?
Ryan Marshall (President and CEO)
So it’s, it’s going to be more comparable to what we experienced in the third quarter, Mike, which was dramatically lower than kind of what we’d experienced Q4 of last year. Q1, Q2 of this year there was a meaningful change when rates went to seven and a half percent. And you know, as much as anything, I think a meaningful change in how the consumer is feeling. And you know, there’s so many things out there that we just have zero control over. Gasoline at 6 plus bucks a gallon, the war, consumer confidence, etc. So we’ve, we’ve factored in our most recent spec conversion experience into our Q4 guide.
Mike Dahl (Analyst)
Okay, good to hear. And then I know it’s not standard practice for you guys, but just given the situation, can you help us understand just, or maybe quantify a little more what the, what the fall off in September was. So maybe order patterns or trends on a year on year basis by month. And then you, you mentioned October started off the same. So October as well. And I know it’s heat of the moment here but, and we don’t want to, we want to be careful about how much to extrapolate after rates have kind of gone up in a straight line.
But this is kind of annual opening time for yourselves and a lot of other builders. So just any early thoughts on how this influences your planning for 27 production?
Ryan Marshall (President and CEO)
Yeah, hey Mike, we’re probably not going to break with trend on the, on the month by month kind of commentary other than just to say that there was a noticeable change in September and, and it’s, it’s continued into October. We are in the middle of, of kind of planning time right now and it’s, you know, the current environment has made it a more difficult planning time. It was, it was part of the reason that in my prepared remarks toward the end I tried to kind of highlight kind of how we’re seeing opportunities and challenges and where we think there are some potential opportunities and there are some and then there’s, you know, there’s plenty of challenges out there as well.
You know, the biggest thing that we’re spending the most time talking about is how we’re going to think about capital allocation. You know, we have a great business, we’re in the right geographies. We love the consumers that we’re serving. There are so many and we have an amazing balance sheet. There are so many good things about our business, our strategy, how we’re operating. Those are the things that we can control when we’re saying grace over and where we can really kind of position ourselves for continued success is to be thoughtful and smart about land spend and capital allocation.
I think we’ve been super clear we’re running this business for the long term, not for kind of this quarter or even next quarter. So that’s how we’re spending most of the time. Thinking about our planning process is really all around capital allocation.
Mike Dahl (Analyst)
Okay, thanks, Ryan.
OPERATOR
The next question comes from the line of Sam Reed with Wells Fargo. Your line is open. Please go ahead.
Sam Reed (Analyst)
Thanks. Everyone wanted to touch on incentive loads a little bit in the third quarter. You know, it looks like they were sort of flattish sequentially versus Q2, but can we perhaps isolate any changes in the composition of those incentive loads by buyer cohort? Like I just want to better understand was there a sequential step up in incentive loads on spec and conversely, you know, or any changes to incentive loads across move up. And then you mentioned in the past that you’ve been doing more build to order closings with rate buy down, slash forward commitments.
Any sense of the attach rate there?
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Sure. I would tell you during the quarter, the 10.4% which was flat sequentially with Q2, we really didn’t see any kind of a change in that dynamic amongst the consumer groups or even within the mixture of it. You know, it’s split between financing incentives as well as discounts on for example, speculative homes that we have on the build to order. We’re really happy with how we’ve been able to use the financing incentives on that. Today about 40% of, you know, the financing incentives and forward commitments we do are for build to order homes.
So as Ryan’s touched on before, those are higher margin homes and so we like the opportunity to use those as we start to kind of build backlog for Q4. And you know, now still even going into 2027,
Sam Reed (Analyst)
That’s helpful. And then let’s maybe switch gears and talk SGA for a second. I wanted to drill down a little bit there. You know, just talk through how much of the SGA, you know, perhaps relative to expectations, above expectations I should say, was a function of higher third party broker commissions. You know, we’ve heard anecdotally from some of our contacts that they’ve been stepping up across many markets. So curious, you know, whether you’re embedding, let’s call it higher broker attach rate and or higher broker commission into your fourth quarter implied SGA guide as well.
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Yeah, Sam, I would tell you there’s not much in our SGA that’s different as a result of broker rate or attachment. The attachment rate has been running higher for probably the part of 18 months because of lack of resale activity. So the brokers that are out there with buyers, you know, the good news is more of them are coming into our sales centers, which means our attachment rate ticks up slightly, but that’s about it. You know, we, we do in certain cases offer broker incentives, but we really try to manage that.
I’d rather see if, you know, there’s incentives that need to be given. We’d rather see those go to the buyer.
Sam Reed (Analyst)
That’s helpful, guys. Appreciate it.
OPERATOR
Your next question comes from the line of Michael Rijo with Melius. Your line is open. Please go ahead.
Michael Rijo (Analyst)
Thanks. Good morning everyone. Wanted to first focus on. Good morning. Wanted to first focus on supply. If we can just dial into that a little bit more and specifically thinking about the secondary market and if there are any markets that kind of stand out to you as being more challenging from a supply standpoint. You know, last month a competitor highlighted Florida and Texas. And I’m just curious if you’re seeing any markets that really stood out on that level in terms of the existing, you know, for sale market that maybe have added a little bit of pressure to the broader landscape.
Ryan Marshall (President and CEO)
Hey, Mike, we’d highlight Texas. Those really all four markets, I think have seen an uptick in available inventory. And it’s, you know, all those, the entire state has been more difficult for some time. You know, we have seen flashes of brilliance in Dallas, in Houston. But you know, Texas continues to be a tougher operating environment. Florida, where we’re positioned, the consumers that we’re serving, we’re not, we’re not in inventory pressure in Florida.
Michael Rijo (Analyst)
No, thanks for that. And you know, maybe just shifting gears a little bit to the balance sheet and the M and A landscape, you know, history may be acquired this past quarter. You know, a pretty good sized regional player in Texas. Just wanted your thoughts in terms of, you know, in this type of backdrop. I’m sure there are, I’d assume some, you know, decent sized regional players that are perhaps seeing some levels of stress in the current market backdrop.
You have a fantastic balance sheet and just wanted to know if you’re, you know, from your perspective, if you’re seeing maybe an increase in opportunities or if perhaps sellers are taking a step back because they don’t want to sell in this type of market. Any thoughts around kind of the, you know, opportunity set, if it’s changed and how you’re thinking about, you know, your, your approach to the market relative to, to past years?
Ryan Marshall (President and CEO)
Mike, we do have a phenomenal balance sheet and you know, it’s, it’s one of the things that I think is arguably our, will probably prove to be one of our biggest advantages in a more difficult operating environment in terms of our approach to kind of M and A, et cetera. Part of, we have such a great balance sheet is because we’ve avoided chasing kind of unnecessary or inappropriate opportunities and we’ll, we’ll stick to that kind of game plan. We do look at a lot of things and we’re just, we’re very choosy and as.
And I won’t spend a ton of time going through it today we look at M and A opportunities is really more allocation of capital into land. And so we think hard about the consumer groups that an M and A opportunity will bring to us. We think hard about the markets that it will give us access to. And if as we go through the evaluation process, we don’t think that helps us in terms of our long term strategy. We’re not interested in acquiring a competitor just for the sake of saying we got bigger because that’s, that’s not where we think value’s created.
So we certainly got the financial strength and financial capability to execute. But we’re going to be super disciplined that if we are pursuing an opportunity, it truly furthers, you know, further and gives us gains against our strategic priorities.
Michael Rijo (Analyst)
Great, thank you.
OPERATOR
Your next question comes from the line of Anthony Pettinari with Citi. Your line is open. Please go ahead.
Anthony Pettinari (Analyst)
Good morning. I was wondering how cycle times trended in 3Q and if there’s any scope for improvement there. And just more generally, as you think about, you know, levers you can pull to protect, you know, margins and returns in a softer market. Is there anything, you know, worth mentioning in terms of, you know, home format or home size or, or anything else, you know, we should keep in mind.
Ryan Marshall (President and CEO)
All right. Hey, Anthony, thanks for the question. And our procurement teams just did a phenomenal job. We’ve maintained kind of our price per foot in the current environment, and I think we’ve done just a wonderful job with that. There is pressure out there on a couple of fronts. And to your cycle time question, we went below 100 days for the first time since pre-COVID, and that includes all of the big four- and five-story multifamily buildings that we do are incorporated in that 99 days. So I think our construction teams have done an amazing job managing production. Our procurement teams have done a great job with cost.
The headwinds that are out there, the current immigration enforcement, which I think has been widely reported on, that’s having disruption in the broad labor market. And so, you know, we’re certainly navigating some cycle time periods as a result of kind of what’s happening more broadly with the labor pool. And then in terms of, you know, are there cost opportunities? We’re always looking for them. But in an inflationary environment, which we seem to clearly be back in, you know, I think it’ll get harder and harder, especially with kind of fuel where it is.
And, you know, nothing gets to our job sites without coming on a truck. You know, those cost pressures I think are real.
Anthony Pettinari (Analyst)
Okay, that’s very helpful. And then you spoke to weakness in Texas. I think earlier you also mentioned the West. Are you seeing anything specific to those markets around local economies or price points or mix or how white-collar workers are doing? Anything that you’d call out in the western region?
Ryan Marshall (President and CEO)
Yeah, the West has been tough for a long time. We’re probably on two, two and a half years of challenges in the West. And they’re really good communities. They’re nice places to live. They’re thriving economies. I don’t think there’s anything that’s broken. The biggest thing that I’d call out is just affordability. It’s really expensive in a lot of the western markets that we operate in, particularly the coastal markets. So, you know, they’re good places where jobs are being created and people want to live there. We’re pretty confident that, you know, this too will turn and they’ll come back into being kind of favorable places to do business. But we’re in, you know, we’re in a little bit of a barrel right now in the West.
Anthony Pettinari (Analyst)
Okay, that’s helpful. I’ll turn it over.
OPERATOR
Your next question comes from the line of Raf Jadrasich with Bank of America. Your line is open. Please go ahead.
Raf Jadrasich (Analyst)
Hi, good morning, it’s Rafe. Thanks for taking my question. Just first on the stick and brick side, I think you commented on the year-over-year trend that you’re still expecting down low single digit in the fourth quarter. How do we think about it sequentially? Is that flattening out or are you starting to see any inflation there?
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Yeah, really the only thing that I’d say in the fourth quarter, and we had called it out earlier in the year, was, you know, lumber started to move up earlier in the year, which we said would be a little bit of a headwind in the fourth quarter. You know, lumber started to stabilize though, but really that’s it. Otherwise, I’d tell you the teams continue to do a good job. And I would tell you Q4 should look pretty similar to where Q3 is.
Raf Jadrasich (Analyst)
That’s helpful. And then if sort of the housing macro backdrop stays similar here kind of into ’27, would you expect raw land prices to start to come down? You talked about walking away from some lots. Like, how do you think about the land price environment from here?
Ryan Marshall (President and CEO)
Yeah, I think it really depends on where the land is located from a city MSA standpoint, but also the specific city block that that land is located in. So there’s some land that continues to accelerate in price. It’s super competitive and, you know, there’s no decreases there. Some of your B and C locations, we’re certainly seeing kind of pricing there change. You know, we all, just as a matter of practice, good market, bad market, we always re-underwrite land kind of multiple times as we go through kind of the entitlement process before we ultimately buy it. So, you know, probably the biggest benefit that we’ve seen is the acceleration of land prices — the rate of acceleration has slowed significantly. But I don’t know that we’re quite into a place where I can tell you that land has gone on 30% end-of-season clearance.
We’re probably not quite there yet.
Raf Jadrasich (Analyst)
Thank you. That’s helpful.
OPERATOR
We will take our final question from Susan Maklari from Goldman Sachs. Your line is open. Please go ahead.
Susan Maklari (Analyst)
Thank you. Good morning everyone. Thanks for taking the question. I wanted to talk a bit about at the higher end. Once people do start to transact, are you seeing any change in the upgrades or the features that they are opting to put in the homes? Are they still spending at the same level once they do decide to make that decision?
Ryan Marshall (President and CEO)
They are. You know, it’s a buyer that’s, you know, assuming they’re making the decision to move forward. They’re better prepared. They’ve got equity from a prior sale. Their personal balance sheets are stronger, and we’re seeing little change in terms of how they’re behaving relative to kind of prior quarters.
Jim Ossowski (Executive Vice President and Chief Financial Officer)
Yeah, I mean, for reference, Susan, in the quarter, options and lot premiums, 117,000 per lot. That’s up from last year and from the prior quarter. A little bit of that is mix because we had less spec sales. But to Ryan’s point, if people are committed to coming in and closing on the home, they’re taking the opportunity to pick the things that they want.
Susan Maklari (Analyst)
Okay, that’s helpful. And then maybe just building on that, are you seeing that there’s more cash sales that are coming through as well in this market?
Jim Ossowski (Executive Vice President and Chief Financial Officer)
No, I think our mix of cash buyers by brand is pretty consistent with what we’ve historically seen. So as a percentage, because we had less time, you know, maybe it ticked up a little bit overall, but, you know, the way we do and I think you should look at it is by buyer type, and it’s unchanged.
Susan Maklari (Analyst)
Yeah. Okay. All right. Thank you. Good luck with the quarter.
Ryan Marshall (President and CEO)
Thank you.
OPERATOR
We have reached the end of the Q and A session. I will now turn the call back to Jim Zeumer for closing remarks.
Jim Zeumer (Vice President, Investor Relations and Corporate Communications)
Appreciate everybody’s time this morning. We’re certainly available if you have questions over the course of the day. Otherwise, we look forward to talking to you in the quarter. Thanks, everybody.
OPERATOR
This concludes today’s call. Thank you for attending. You may now disconnect.
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