Higher interest rates aren’t deterring PulteGroup’s buyers, with the builder posting record third quarter profits even as buyers grapple with higher mortgage costs.
“Fed actions and broader market forces have combined to push interest rates to 20-year highs, but the fundamental desire for homeownership is strong while the supply of houses remains constrained,” president and CEO Ryan Marshall said.
PulteGroup reported a profit of $639 million, or $2.90 per share, up from $628 million, or $2.69 per share, in the third quarter of 2022. Profits per share outperformed analyst projections by nearly $0.10 per share.
Home sale revenues during the third quarter increased 3% over the prior year to $3.9 billion.
Marshall said the results were driven by a continuation of recent positive trends as well as the builder’s strategic mix across spec and build-to-order homes as well as first-time, move-up, and active-adult buyer cohorts.
“PulteGroup’s ability to offer a variety of locations, price points, floor plans, and incentive packages allows us to meet consumer needs while helping to address the affordability challenges caused by today’s higher rates,” he said.
Benefits of Diversification
During the home builder’s earnings call, Marshall highlighted the benefits of PulteGroup’s diversified portfolio in the current housing market.
“Our spec business allows us to more cost-efficiently serve first-time buyers, while our build-to-order business caters to move-up and active-adult home buyers looking to personalize their home location and design features,” Marshall said during the call.
First-time buyers accounted for 38% of orders in the quarter, move-up buyers represented 37% of orders, and active-adult buyers accounted for 25% of orders, according to executive vice president and chief financial officer Bob O’Shaughnessy.
Marshall said the shift toward spec communities for first-time buyers also benefited the company’s operating results in the third quarter. He said the additional inventory afforded by the builder’s spec strategy was “important” given 49% of sales in the third quarter were spec sales. The share of spec sales has decreased from 58% as recently as the first quarter of 2023.
“I think the relative decrease in the amount of spec sales in the quarter reflects two interesting dynamics: On the one hand, the affordability challenges caused by higher interest rates are pushing some buyers, particularly first-time buyers, to the sidelines for now. On the other hand, more affluent buyers who are less fearful of rates are more comfortable contracting for a home where they have selected the lots, the floor plan, and the design options,” Marshall said.
Net new orders increased 43% year over year to 7,605 homes in the third quarter as PulteGroup realized gains in both units and absorption pace across all buyer groups. O’Shaughnessy said first-time buyer orders increased 53%, move-up buyer orders increased 56%, and active-adult buyer orders also recorded double-digit gains.
Marshall discussed how the performance of PulteGroup’s active-adult business in the quarter is an illustration that not all buyers are reacting to high interest rates with the same patterns.
“In an operating environment where rising mortgage rates are creating increasing affordability challenges, 47% of our Del Webb buyers were cash buyers. This is up from 33% just two years ago,” Marshall said. “[In addition to] largely being cash buyers, these are customers who can afford the premium lots and upgrades that make active adults our highest margin business.”
Marshall shared that a recently opened community, Kensington Ridge by Del Webb, in Milford Township, Michigan, not typically considered a hotbed for retirees, sold 114 houses in just over 100 days, illustrating demand is still strong among the active-adult cohort.
“We fully appreciate to some degree all buyers are impacted by rising rates and macroeconomic concerns, but buyer groups can absolutely behave differently over the course of a housing cycle,” Marshall said. “For PulteGroup, we believe being diversified across all buyer groups can enhance both growth and stability.”
New-Home Orders, Sales Pace, and Starts
O’Shaughnessy said the higher revenues in the third quarter reflect a 2% increase in the average sales price to $549,000 in combination with an increase of closings by less than 1%. The 2% gain in the average sales price was driven by increases of 4% and 6% for move-up and active-adult buyers, respectively, partially offset by a 3% decrease in prices for first-time buyers.
PulteGroup’s third quarter absorption pace averaged 2.5 homes per community, an increase from 2.0 homes per community in the third quarter of 2022. The third quarter cancellation rate was 9%, slightly up from 8% in the prior-year period. However, O’Shaughnessy said cancellations were down 20% on a unit basis compared with last year, but the relative size of backlog in each period contributed to the cancellation rates being comparable. To that end, the company’s unit backlog at the end of the quarter was 13,547 homes with a value of $8.1 billion, down from 17,053 homes with a value of $10.6 billion last year.
Marshall said the company has responded with adjustments in product, pricing, and incentive programs to help prospective buyers address affordability challenges in the high-rate environment.
At the end of the quarter, PulteGroup had 17,376 homes under construction, down 24% from the same period a year ago. Approximately 39% of homes under construction are spec homes. O’Shaughnessy said the company is being “thoughtful” about aligning the pace of starts with the pace of sales to prevent putting too much inventory on the ground in a potentially uncertain period.
Cycle Times and Land Approach
Marshall said PulteGroup continued to shorten its production cycle in the third quarter. While still several weeks above the builder’s pre-COVID cycle time of approximately 90 work days, the cycle time of 140 days at the end of the quarter was a significant improvement from a cycle high of 170 days.
“Our teams continue to shave days and weeks off our build cycle, and we remain optimistic about our ability to get back below 100 days in 2024,” Marshall said.
In the third quarter, PulteGroup invested $1.2 billion in land acquisition and development, which puts the company on track to invest upward of $4 billion on land in 2023. Two-thirds of land spend was allocated toward the development of existing land assets. PulteGroup ended the quarter with approximately 223,000 lots under control, 53% of which were held via option.
