Driven by improved demand conditions during spring selling season and the implementation of strategic initiatives, Tri Pointe Homes met or exceeded all guided metrics for the first quarter of 2023. The builder reported revenue of $768 million and profits per share of $0.73, outperforming analyst expectations of $0.41 profits per share.
With a stated goal of improving order pace and volume in response to macro conditions that dampened affordability and buyer sentiment, Tri Pointe’s focus on product repositioning, targeted pricing, and incentive strategies helped the builder deliver an absorption pace of 4.0 orders per community per month, well above pre-pandemic historical seasonal levels.
The builder says supply and demand dynamics remain a “strong tailwind” for the home building sector and Tri Pointe’s implementation of strategic initiatives positions the company to continue its growth trajectory.
Following the builder’s reporting of its first quarter earnings, Tri Pointe Homes CEO Doug Bauer spoke with BUILDER about the company’s results and current housing market trends.
BUILDER: How has the housing market shifted in the first four months of 2023 compared to the latter months of 2022?
Bauer: What was most encouraging [from our first quarter results] was the engagement of the consumer in the early stages of the spring selling season. The consumer kind of went on pause for the back half of 2022 with some pretty rapid rate increases that have been well-discussed. [In] January and February, we started to see the consumer re-engage in the home buying process.
I’ll touch on two macro factors that are contributing to this spring selling success for new-home builders and Tri Pointe Homes. It has a long tailwind to it. The first one is on the demand side, the millennial generation has officially moved from renters to homeowners. We reported last week 59% of our buyers that go through our mortgage company are millennials and 9% are Gen Z. That’s a demographic group that has a significant population effect and is going to drive demand for a long time.
The second contributing factor is the supply. New-home builders’ biggest competitor is the resale market. Relatively speaking, there’s a very low supply of resales because most of the U.S. that owned a house has refinanced under 4%. Unless they have a life-changing event, they are staying put. The resale months of inventory is 2.6 months across the country. When I talk to our sales team, I constantly hear the fact that the consumer really is focused on new-home sales as an opportunity versus the resale market that has a very limited supply.
BUILDER: Are you finding prospective buyers are still sensitive to changes in interest rates? Or have buyers begun to accept higher rates such that shifts in rates are not impacting move-forward decisions as much as they have in previous periods?
Bauer: When you’re buying a house, it’s the most expensive durable good you’re ever going to buy. It’s a very emotional decision. It’s a very psychological decision. The consumer, for the back half of 2022, saw all these rapid rate increases with mortgage rates going from 3% or 4% to 7% and everybody sat on the sidelines. The consumer—millennials, Gen Z, the buyers—are not going to sit on the sidelines forever. The consumer has come to the realization that mortgage rates are where they are today. There’s not as much of a pause based on the current mortgage environment. Frankly, the Fed has probably helped that a little bit; it went through such a rapid rate increase last year and then we’ve seen it settle into a 25-basis point increase. There are enough things in the macro economy that still are going to take time to come through the economy so the Fed is messaging that it may just stay put for a while. I think all that has been built into the 10-year Treasury and the mortgage rate environment.
The other advantage that new-home builders have mortgage-wise compared with the resale market is we can use incentives depending on your down payment to temporarily or permanently buy down your mortgage rate. For example, our average loan amount at Tri Pointe is about $500,000. Depending on your down payment, [we] can permanently buy that rate down with an incentive of $15,000 to 5.75%. That’s a huge advantage that the new-home builders have compared with the resale market.
BUILDER: How big a role are incentives and buydowns playing for Tri Pointe moving into the second quarter?
Bauer: We’ve seen a general trend across most of our markets of a very small pullback in incentives. We’ve actually in select communities across the country had some price increases. There is a stabilization going on. But I think as long as rates are in the 6s, I think incentives will be used.
New-home builders, as we saw a tremendous slow down in the market last year, did a number of things. At Tri Pointe, we repositioned product and redesigned product to be more cost-effective. Net net, we’ve reduced pricing 15%, possibly in some markets even up to 20%. The resale market has only come down 9%. Not only are incentives available to buy down rates and make the house more affordable, but also the new-home builders have readjusted our product, our positioning, and our pricing as we entered the new year.
BUILDER: During recent earnings calls, Tri Pointe Homes has mentioned offering lower square footage or simplified products to help attainability. Are these short-term solutions/adjustments or changes that will remain in place moving forward?
Bauer: I think it’s more of a long-term perspective for Tri Pointe. We repositioned our company several years ago as we grew from the West Coast further East. Of our active communities, 64% are outside California. The focus on entry-level and first move-up is a primary driver for Tri Pointe. We continue to focus on affordability. It’s a big mantra for me. I have millennial kids, and I want them to be able to afford a house. Eighty percent of our average community count is coming from the entry-level or first move-up buyer segment. California is still very expensive, though in the Inland Empire we offer a very affordable entry-level product. But in the Carolinas, Texas, and parts of Arizona, we can offer a very strong, affordable product lineup.
BUILDER: What is the company’s approach to spec vs. built-to-order homes? Are you seeing more demand for quick move-in homes from the first-time buyer segment?
Bauer: Our spec homes represent 65% of our total starts going into 2023. When you’re dealing with entry-level or first move-up buyers, we can still offer some premium brand options, some optionality depending on the stage of the house, but still have almost two-thirds of our homes started [be] spec. That helps the entry-level and the first move-up, because they typically have a shorter time frame for when they want to move in. Frankly, in today’s interest rate environment [people want to lock in rates]. We can lock your rate in for up to 270 days. So, having a house started and partially completed, giving you some optionality is good because we can also lock in the rate. We’ll continue to be a spec builder of roughly 65% or two-thirds of our starts.
BUILDER: Given the sales pace during the first quarter and April, do you anticipate increasing starts over the course of 2023?
Bauer: I believe our company and the industry has the capacity to re-engage and up their starts. We reported a pretty healthy order pace [in the first quarter]. In April, we experienced continued strong demand. Our start pace matches or stays strongly aligned to our sales pace. I believe not only our company but also the industry has room to pick up starts. The housing market feels very normal right now. We are in a normal spring selling season. There’s the typical constraints on labor—labor constraints were here before the pandemic, the aging workforce in the construction industry is not getting any younger. But [the market] has just gotten more normal. Sales, starts, and closings are getting more normal. You had two years of hyper demand during the pandemic that was unsustainable. We had then a back half of 2022 where everything cooled down to almost a screeching halt. Across the country, starts and permits through March are down a little over 20%. So, you’re starting to crawl back, but it’s a much more normal pace.
BUILDER: How is the company approaching land and land acquisitions? Is there any relief related to land prices? Is there an appetite to acquire land once again or is that being approached cautiously still?
Bauer: In the back half of 2022 when everything had come to a halt, all of the builders put land that was under contract on pause. We’ve all walked away from certain options. Now that you’ve come through the beginning of this year and we’ve seen a decent amount of price discovery, land is a function of what you can sell a house for—it’s a residual calculation. So, technically land, depending on where you’re looking, will have gone down in value because the house price has gone down. There could be some trade offs between some cost components, but we reported an 8% to 10% improvement in costs to date on the direct stick and bricks. But, we’re always in the land market at Tri Pointe. Land is the raw material that feeds the company. We’ve got an excellent pipeline through 2025. Our land teams are focused on land deals that come to market in late 2025 and 2026.
