PulteGroup Inc (PHM) — Q3 2025 Earnings Call Transcript

Good morning, and thank you for joining this morning's call. I look forward to updating you on PulteGroup's strong Q3 financial results and the underlying business strategies that have positioned our operations for ongoing success. Specific to the company's third quarter results, our homebuilding operations successfully closed over 7,500 homes, which helped to drive another quarter of overall strong financial results. As Jim will expand on shortly, I am pleased to highlight that PulteGroup generated third quarter home sale revenues of $4.2 billion, operating margins of 16.8%, and earnings of $2.96 per share. And given our focus on returns, I would also highlight that the company has delivered a return on equity of 21% for the trailing 12 months. These results reflect the strength of our diversified operating model, which continues to serve us well in a U.S. housing market where home buying demand has been challenging. Geographically, our diversified operating platform that spans across 47 major markets remains a key strength. While our broad reach across buyer groups, including first-time, move-up, and active adults provides unique strategic advantages that are helping us to successfully navigate today's demand dynamics. Specifically in today's market, weaker consumer confidence and stretched affordability are limiting opportunities with first-time buyers, while demand has been more resilient within the active adult segment, where we, through our Del Webb brand, are a recognized leader. For those of you that have not had the opportunity to visit the Del Webb community, think of it as a Disney Cruise ship for those 55 and older. Sized between 500 to 1,000 homes, Del Webb communities are larger and offer amenity packages that can include everything from tennis, pickleball, fitness, spa to social activities, food, and dining. But more than anything, Del Webb communities offer personal connections in a place to belong. As we highlighted on previous calls, we are capitalizing on the brand recognition and power of the Del Webb name through our new Del Webb Explore communities. Our new Del Webb Explore brand is designed to serve today's Gen X buyers looking for an amazing luxury lifestyle but without the age restriction. We are in the early stages of planning a 'get to know Del Webb' event in 2026, and we will keep you posted on the timing. Getting back to our results, in the third quarter, traffic to our communities was higher than last year. Although conversion rates fluctuated from week to week, based on feedback from our sales associates, consumers remain engaged in the home buying process, but they are proceeding with caution given concerns ranging from economic weakness and job stability to stretched affordability. I think that is why the response to the decrease in interest rates was more muted than we experienced in other periods of recent rate declines. We have always said that lower interest rates are a positive for housing demand, but rates don't operate in a vacuum. There is a clear offset if rates are coming down because the economy is slowing and people are worried about their jobs. I believe that is the scenario we are experiencing right now. That being said, I would note that our Q3 absorption rate of 2.2 homes per month was consistent with our pre-COVID average, although down from last year's third quarter absorption rate of 2.4. Again, while demand conditions differ by market and buyer segment, we would characterize U.S. housing demand as good, albeit competitive and with some challenges. However, our size and scale allow us to compete effectively. As discussed on prior calls, earlier in the year, we proactively made decisions to better align production levels with sales volumes. In the third quarter, we started 6,557 homes, which effectively equaled our Q3 sales pace. This pace is consistent with our strategy to match starts with sales as we work toward an appropriate level of inventory relative to current market demand. When setting our starts pace, our goal is to have the right level of inventory to meet core demand while avoiding excess finished spec production, thus allowing our sales team to sell from a position of strength. With our average build cycle now down to just 106 days, we can carry less inventory and still be responsive to any demand acceleration in Q4 or as we enter 2026. Along with adjusting our pace of production, earlier in the year, we moderated our planned land spend for 2025 and remain on track to invest approximately $5 billion in land acquisition and development. At over $5 billion, our land spend would be down 5% from last year, but we remain in a strong position with a healthy land pipeline. A pipeline that can enable us to grow the business when home buying demand increases. Let me finish my comments by recognizing and saying thank you to the entire Pulte team. They have truly done an outstanding job navigating 2025's evolving market conditions while staying focused on delivering outstanding quality and service to our home buyers. You've done an amazing job team. Now let me turn the call over to Jim for a detailed review of our third quarter results. Jim?

Thank you, Ryan, and good morning, everyone. I appreciate the opportunity to review PulteGroup's Q3 financial results. In the third quarter, Pulte's net new orders totaled 6,638 homes, which is 6% lower than the third quarter of last year. The year-over-year decline in Q3 net new orders reflects a 10% decrease in absorption pace, partially offset by a 5% increase in our average community count to 1,002 communities for the quarter. As a percentage of starting backlog, our cancellation rate for the third quarter was 12%, which is modestly up from 10% last year. On a sequential basis, the Q3 cancellation rate was up 60 basis points from the second quarter. This tells us that most home buyers once under contract remain committed to their home purchase. As Ryan noted, our third quarter absorption pace is 2.2 homes per month compared with 2.4 homes per month in Q3 of last year. Higher demand in the quarter reflected a typical seasonal pattern, although core demand in 2025 has been below what we experienced in 2024. Broken down by buyer group, net new orders among first-time buyers were down 14% from last year, and our move-up business was down 3%. As has been the case throughout 2025, our active adult business remains our strongest buyer group as net new orders increased by 7% over Q3 of last year. In the third quarter, net new orders within our active adult business benefited from both an increase in community count and absorption pace. Active adult sales represented 24% of Q3 net new orders. And as we have shared on previous calls, most of these homes will be delivered in 2026. Home sale revenues in the third quarter totaled $4.2 billion, which is down 2% from last year's Q3 revenues of $4.3 billion. The decline in home sale revenues reflects a 5% decrease in closing volumes to 7,529 homes, partially offset by a 3% increase in average sales price of $564,000. Closing average sales price benefited from the geographic mix of deliveries realized in Q3 of this year. By buyer group, closings in the third quarter were comprised of 39% first-time buyers, 39% move-up buyers, and our active adult business represented 22%. This is generally in line with our mix in the third quarter of last year when our closings were 40% first-time buyers, 40% move-up buyers, and 20% active adult. Reflective of Q3 orders and closing volume, we ended the third quarter with a backlog of 9,888 homes valued at $6.2 billion. In the third quarter of last year, our backlog was 12,089 homes with a value of $7.7 billion. We ended Q3 with 15,096 homes in production, of which 7,369 or 49% were spec homes. In absolute numbers, our quarter end inventory of spec homes was down 1% from the third quarter of last year and down 16% or almost 1,400 houses from the start of this year. Our field teams have done an excellent job managing starts as they work to balance inventory levels with consumer demand. Given current sales trends and specifically the number of built-to-order contracts we are executing, specs are likely to remain closer to 50% of production for the next several quarters, which is higher than our target range of 40% to 45%. Since spec homes continue to make up a large percentage of overall sales, we are comfortable with our strategy for managing our spec position. Based on sales activity and the number of homes in our production pipeline, we expect to close between 7,200 to 7,600 homes in the fourth quarter. Given this guide for expected Q4 closings, the math tells you that we could exceed our previous guidance as full year closings likely end up in the range of 29,000 to 29,400 homes. We still have homes to sell and close to achieve these numbers as we are focused on converting spec inventory into closing and finishing the year strong. Given our backlog, production pipeline, and recent order trends, we are still guiding to our average sales price of closings to be in the range of $560,000 to $570,000 in the fourth quarter and the full year of 2025. Looking at our land pipeline, we continue to expect our community count in the fourth quarter to be 3% to 5% higher than the comparable prior year period. In line with our previous guidance, we reported a third quarter gross margin of 26.2%, which on a sequential basis is down 80 basis points from Q2. Pulte's third quarter gross margin is inclusive of higher incentives incurred during the period, resulting from demand conditions and local competitive dynamics. Incentives in the third quarter were 8.9% of the gross sales price, which compares with 7.0% last year and 8.7% in the second quarter of this year. While incentives moved slightly higher, teams are doing an excellent job controlling build costs, which at $79 per square foot were consistent with the prior year and with the second quarter of 2025. Let me just add a quick update here to our prior comments regarding the impact of tariffs. At this time, we estimate that tariffs will effectively have little to no impact on our closings in Q4 of 2025, but they could increase build costs by roughly $1,500 per home starting in 2026. We will provide a more definitive estimate on tariffs when we report our fourth quarter earnings in January. Factoring in current demand conditions, the generally competitive local market dynamics, and our goal of reducing excess finished spec inventory, we now expect fourth quarter gross margins to be in the range of 25.5% to 26.0%. For the third quarter, SG&A expense was $401 million, or 9.4% of home sale revenue. This is comparable to prior year SG&A expense of $407 million, or 9.4% of home sale revenues. In the face of current market dynamics, we remain focused on appropriately controlling our overhead spend and finding opportunities to lower expenses while still delivering the build quality and buying experience for which Pulte is known. Given the success of our efforts, we are maintaining our previous guide for full year 2025 SG&A expense to be in the range of 9.5% to 9.7% of home sale revenues. Our financial services operations reported third quarter pretax income of $44 million, which is down from $55 million in Q3 of last year. Pretax income for the quarter was impacted by lower closing volumes in our homebuilding operations and a lower capture rate in the period. Our mortgage capture rate in the third quarter was 84% compared with 87% last year. For the third quarter, PulteGroup's reported pretax income was $768 million. In the period, our tax expense was $182 million, or an effective tax rate of 23.7%. Our effective tax rate in Q3 benefited from the purchase of renewable energy tax credits. For the fourth quarter, we expect our tax rate to be approximately 24.5%, assuming no discrete period-specific tax events. We reported third quarter net income of $568 million, or $2.96 per share. In the third quarter of last year, the company reported net income of $698 million, or $3.35 per share. PulteGroup's third quarter earnings per share was calculated based on 198 million diluted shares outstanding. Our share count is down 5% from the prior year as we continue to execute our stock repurchase program. In this year's third quarter, we repurchased 2.4 million common shares for $300 million. Through the first 9 months of 2025, the company repurchased 8.2 million common shares for a total of $900 million, or an average price of $109.81 per share. At quarter end, we have $1.3 billion remaining under our existing share repurchase authorization. Consistent with our stated capital allocation priorities, we invested $1.3 billion in land acquisition development in the third quarter, with 54% deployed toward the development of our existing land assets. Year-to-date, we have invested $3.8 billion in land acquisition and development as we work to maintain a reliable pipeline of near- and long-term buildable lots. We ended the third quarter with approximately 240,000 lots under control. On a sequential basis, it's down 9,000 lots from the second quarter as we elected to walk away from certain option deals that were years out and early in the entitlement process. These actions are consistent with our disciplined land underwriting practices and capital allocation process. Our ability to proactively manage our land pipeline demonstrates the importance of our differentiated approach to controlling critical land assets. As we have highlighted in the past, over 80% of Pulte's land option was the underlying land seller, with the remainder structured with one-off transactions with a select number of land bankers. We remain disciplined in executing our option strategy, focusing on enhancing project returns and mitigating market risk. Based on operating results through the first 3 quarters of 2025 and adjustments we have made to this year's production and planned land spend, we still expect cash flow generation for the full year to be approximately $1.4 billion. Let me close with a few comments about our balance sheet. We ended the third quarter with $1.5 billion of cash and a debt-to-capital ratio of 11.2%. Adjusting for the cash balance, our net debt-to-capital ratio at quarter end was 1.1%. Now let me turn the call back to Ryan for some final comments.

Thanks, Jim. Before opening the call to questions, I wanted to provide some additional color as to the market conditions we are experiencing. Generally, buyer demand in the third quarter reflected a typical seasonal pattern, although buyer demand at the local market level also reflected new and existing home inventories, which in a number of markets remain elevated. Seasonal demand trends remain on track through the first few weeks of October with traffic and buyer interest generally comparable to what we experienced in Q3. From a sales standpoint, we are now in the seasonally slowest part of the year, but we remain optimistic that lower rates in combination with the strong economy and higher confidence can ultimately work to energize new and just as importantly, existing home sales. For obvious reasons, we focus on the new home market, but demand within the existing home market remains soft, resulting in elevated levels of inventory. To the extent that lower rates can revitalize existing home sales, it will be a positive for U.S. housing. Specific to PulteGroup's third quarter results, we experienced better home buying demand in parts of the Midwest, Northeast, and the Southeast in markets ranging from Cleveland, Charlotte, and the Coastal Carolinas to Tennessee and D.C., Northern Virginia. I'm also extremely pleased again to call out the relative strength of our Florida operations as our teams there continue to execute at a very high level. As you can see in this morning's press release, third quarter net new orders for the state of Florida increased by 2% over the prior year. Market conditions are competitive, but our local teams are led by experienced operators who have assembled exceptional land pipelines over the years. As has been the case for much of the year, consumer demand in our Texas and Western markets remained soft in the third quarter. You have heard me say before that we can't be margin proud. So when operating in more difficult market conditions, our local teams understand the importance of finding the market and turning assets while not giving away price needlessly. That is the approach we continue to take as we compete for sales and work to sell through finished inventory. I think it's fair to say that home buying demand in 2025 has been more challenging than the industry was anticipating. And while it has been more challenging, I think PulteGroup's year-to-date results continue to demonstrate the importance of our diversified and balanced approach to the business. With a platform that extends across multiple markets and buyer groups, and a business model that allows for greater operating flexibility, we continue to deliver strong cash flows and high returns. Before wrapping up, I think it's appropriate to offer some thoughts about comments issued recently by President Trump regarding the need for more housing and better affordability. We agree with the President's perspective, as it is consistent with industry estimates that routinely reference an underbuild in this country of 3 million to 4 million houses. While the supply deficit certainly has an impact on affordability generally, the complexities of the new home construction industry dictate that tackling a problem of this scale requires a coordinated and comprehensive approach that brings together federal, state, and local leaders working in partnership with the new home construction industry. We share the President's focus on housing and want to make the American dream more attainable for everyone. We look forward to helping address the issue of housing in America and working with the administration in developing actionable solutions that are consistent with Pulte's long-term strategic plans. Now let me turn the call over to Jim Zeumer.

I'd love to pick up on, of course, that last comment there, Ryan. So maybe if you can kind of delve into a little bit your dialogue with either the FHFA and the administration today. Kind of from your perspective, what's the sort of the right path forward here for Pulte in the homebuilding industry? And I'm curious if you can expand on that last comment around what maybe some of those actionable solutions could potentially be.

Yes. So Matt, in fairness, we're not going to have this call be dominated by some of the comments in the recent past. There are too many positive things happening inside of our business, and we're too excited about the future strategic direction that we're going. The prepared remarks that I just shared, I think, are fully comprehensive of how we feel on the topic. We have had communication with the administration. We certainly think it is a complicated issue that is largely rooted in local politics and anti-growth mentalities. And it's going to be complicated to unravel it, and it's going to take a coordinated effort. So hopefully, that helps, but it's taken us a long time to get into the situation that we're in as a country to create this structural housing shortage. It's going to take time to unwind it as well.

Okay. No, fair enough. I really appreciate those thoughts. So maybe secondly, kind of delving into your own strategy. I think I heard you mention at the top that you're planning to run spec production closer to 50% now you had been saying for a while you were trying to get it back down to 40% to 45%. So I mean, is this more of kind of a market-driven approach, just simply saying, look, this is where the demand is better today for quicker move-in homes? Or are there kind of any other subtle shifts around your intention going forward from a volume and production perspective?

Yes, Matt, I want to emphasize two key points. First, we have consistently stated that we aim for our starts to align with sales, with a preference for our overall spec production to be in the range of 40% to 45%. That goal remains unchanged. Due to the challenging sales environment we are currently facing, we have sold fewer to-be-built homes than we expected. Consequently, the structure of our overall backlog has resulted in a slightly higher percentage of specifications, even though we have actually reduced the number of specs in production. This increase in headline percentage is not a major concern for us; our primary focus is on the actual number of specs we are comfortable maintaining. Additionally, we are concentrating on increasing our to-be-built sales, which aligns with our historical operational strategy. In time, I believe this percentage will align closely with our ultimate goal.

The first one kind of dovetails off of Ryan's comments towards the end there about Florida and the Southeast in particular. I mean, Florida orders were up about 2.4%, Southeast was up 1%. I mean our checks seem to indicate sort of some stabilization in demand, pricing, and even inventory in these markets. Just curious for your comments on those factors. Are you seeing something similar?

Yes, we are, John. There are markets that we've been bullish on. Even if you went back 2 or 3 quarters ago when there was a lot of concern about Florida, we were pretty consistent in saying Florida is a good market for us. We've got great locations. We're not worried. And I think the results that we demonstrated over the last 2 quarters that we've shown positive comps in the Florida business. I think it is indicative, one, of the outstanding locations that we have and that buyers want to live in those communities. And then two, I think there is some good stabilization in Florida. You mentioned the Southeast as well, and I think the same holds true. So these markets, the Southeast and Florida, are still places people want to move to. The weather is certainly desirable. From a business standpoint, the locations are generally pro-growth. They've got good tax policies. And I think those are things that are very accommodative to having a healthy housing operation.

Okay. That's encouraging. And then the $79 per square foot in stick and brick being consistent, I think that, that's encouraging. We've heard on the land side that not only are builders able to get a little bit of a break on the development side, but actually able to go back and renegotiate price and take down schedules. Are you seeing anything along those lines as well that might be helpful as we move into next year?

We are, John. We're definitely seeing some favorable terms, particularly on earthmoving and some of the underground work, things that involve heavy machinery. We're seeing more favorable terms than what we've experienced over the last few years. And those input costs that go into our future lot costs, I think that will certainly be beneficial in helping to reduce the amount of land inflation that we've been seeing.

I wanted to change the focus to the mix. Ryan, you previously mentioned the active adult business, which clearly sets Pulte apart from the competition. Over the last 4 to 5 years, the move-up segment has decreased from 45% to 38%, while the first-time segment has increased from 31% to 40%. As we look ahead to 2026 and 2027, considering the higher margins for both the move-up and active adult segments, how should we anticipate that mix changing in the next few years, especially as your build times improve, which has been a significant factor in promoting spec homes and possibly transitioning towards a ready-built model?

Yes. So Mike, we've worked really hard to kind of position our land pipeline toward what we view as an optimal mix of business that's indexed against what the overall opportunity is. Starting with the first-time entry-level buyer group, we see that business in the range of 38% to 40% overall. So pretty consistent with where we're operating today. And I think that is indexed against the overall buying opportunity or buyer profile in the United States. The move-up business, we have intentionally brought down into that same range of about 35% to 38% ideally. And then the balance is our active adult business at 25%. So we're with our current sales rate, which Jim shared was basically 40%, 38%, 22 in the quarter. We're almost perfectly indexed to where we want to be. The change that you'll see continue to play out over the next few quarters will be the active adult business going up to that ideal 25%. So we like the way the business is positioned. Certainly, the first-time entry-level buyer group is one that's been more challenged in this current environment. That won't last forever. And we certainly think as housing demand starts to return, that's a buyer group that we're going to be well positioned to serve. I would remind everyone that our first-time entry-level communities do tend to play on the higher end of the price range of first-time entry level. They're typically closer in and slightly better located. And so while it is a first-time entry-level buyer, it's not the lowest price segment of that particular consumer group.

Yes. Great. I appreciate that, and that's an important reminder on the first-time business. I guess, secondly, I know it's a little premature to give formal '26 guidance. But I think one of the questions we've gotten, and maybe not just for Pulte, but more broadly for the group, is right now you're trending backlog volumes down as of the end of this quarter, 18%. I would assume that by the end of next quarter, it might be in a similar type of ZIP code. I think a lot of people are struggling with volume growth, the prospects for volume growth next year, even if community count is up 0 to 5 or mid-single digits, which I know is probably your ongoing goal. Maybe you could kind of walk through how you get to volume growth for next year. And again, not asking for formal guidance, but either your directional level of confidence or what investors might be missing?

Yes, Mike, we look forward to providing our full guidance for 2026 at the end of our next quarter as we conclude the full year. In the meantime, we have an excellent land pipeline that we've worked hard to develop over the past 3 to 4 years, which is well-prepared for us to continue growing our business. We definitely need the consumer and the market to align with that. As we've indicated, we will maintain a balanced start rate to ensure it's responsive to actual demand. There are factors beyond our control, but we believe that if interest rates decrease slightly and consumer confidence improves, there is a strong desire for homeownership, and we feel well-positioned to take advantage of that. Additionally, our build time has decreased to 106 days, with even quicker times in some of our entry-level starter communities. This gives us ample time before we need to decide on increasing our production levels to support potential growth in 2026 compared to 2025. Overall, we remain positive and optimistic about the current state of our business and, more importantly, the opportunities ahead. Please stay tuned for our full guidance for 2026 at the end of next quarter.

First question, Ryan, I'd like to hear your thoughts on the current state of the consumer. You mentioned in your prepared remarks that lower interest rates are typically beneficial for housing. However, it seems that people may be increasingly concerned about their jobs or the economy's direction right now. Over the past 60 or 90 days, have you noticed the consumer entering your communities feeling more financially stretched? Are you finding it more difficult to qualify buyers? Are there more concerns being raised about the economy? Any insights you can provide would be appreciated.

Yes, Alan, I think the majority of the focus that I would probably share is around consumer confidence. And so the benefit that we've seen when rates have come down has been the overall lift in consumer confidence. The actual financial benefit from rates coming down is still not at the level that we're incentivizing with our forward mortgage commitments. So the rates we've been offering and continue to offer are far better than anything that the consumer will get by a change in the interest rate environment coming down. So what we're looking toward is some improvement in the kind of overall footing and foundation of consumer confidence. There's a lot that goes into that. We're at a doggone near at a 10-year low. So hopefully, we're kind of bottoming out on that, and we can start to turn that around and go the other direction. You combine that with the opportunity potentially for some further rate cuts this year and into next year. And I think the industry can be in a tremendous position to capitalize on what is the underlying desire for homeownership and housing demand. We know there's a structural shortage of housing. And if we can just get consumers confident about making this major purchase in their life, I think we can see some upside in '26.

Great. I appreciate those comments, Ryan. Second question, pivoting back to the government, but not necessarily, I guess, what everybody has been most focused on. There has been some good news coming out. I mean, I think the Senate recently passed a bill called The ROAD to Housing Act, which seems like it has a few pieces in there that could be longer-term positives for your business. We've heard a little bit of chatter about the potential for purchases of MBS by some entity. I know Jerome Powell kind of threw some cold water on that. But I'm curious if you're seeing either anything in that bill or any other chatter you're hearing that could actually be near-term or intermediate-term positives for housing demand in your business?

Yes, Alan, what I want to emphasize is that we are seeing politicians from various sides of the spectrum discussing housing. This is an important issue for our country as we all strive to grow the economy and create more jobs. It’s crucial to find the right balance, as new jobs require new homes. If we can encourage our political leaders and community members at all levels to recognize that housing is a vital component of economic growth, we might adopt a mantra of creating two jobs for every home. By implementing policies that support this approach, we could gradually address the structural housing shortage we've been facing.

Good job in a really tough market. I wanted to talk about the incentives a little bit. I think you brought up the forward purchase commitments. But I think you said incentives, if I heard correctly, were 8.9%. I think last year, they were 7.0%, so kind of up about 190 basis points and at a pretty high level, obviously. So I'm wondering, first of all, just to get our facts straight, how much of these incentives at this point would you classify or categorize as financial incentives, like closing costs, rate buydowns, forward purchase commitments, and stuff like that? And are these reflected in ASP or COGS? And compare that to like upgraded features and stuff, like nicer countertops and all that kind of stuff. And are they in ASP or in COGS, just to level set our understanding?

Yes, Stephen, great question. So any of the incentives that we have, whether it's in the form of financing incentives or, say, a discount to your point on some of the options that we might give people off, those are a reduction in your gross sales price, so they're a reduction in your ASP. The financing incentives are probably about 1/3 of the total incentive package that we report each quarter.

Okay. So about 1/3 are financial. So the majority of yours are like upgraded features and stuff like that just to clarify.

Yes. It would be if we want to offer some money off at a design center, perhaps you have a finished spec inventory, and you provide a slight discount on that. So that's about two-thirds of the mix.

That's encouraging that not many are financial. However, could you provide more details? Specifically, within the financial incentives, how much is related to forward purchase commitments compared to regular rate buydowns and closing costs? If you could share how much you have spent this year on forward purchase commitments or what principal amount that has covered, that would be helpful.

Yes. I mean the forward commitments, I'd tell you, probably roughly 30% of our consumers actually use that. So it's not a large percentage in total. But I would tell you financing incentives have been around forever. If you go back even pre-COVID times, those have always been there, and probably 80% of our customers have had some sort of financing incentives. So I'd say it's probably maybe half of it is some of the forward commitment. But again, we're always looking for things that we can go ahead and help consumers as they're looking to kind of find the right financial payment that they need every month or closing costs to get them over the finish line.

I was wondering if you could drill down a little in terms of the bridge between the current 4Q gross margin guide, 25.5% to 26% versus the prior, I guess, 26%, 26.5%. And I guess, specifically, kind of how to think about the impact of lower mortgage rates, maybe making those buydowns cheaper for you versus maybe any kind of other offsets you'd flag?

Yes, that's a great question. I would say that the forward commitments or mortgage buydowns are not very impactful. Although rates have changed slightly, it isn't significant. As we approach the fourth quarter, we have many factors to consider. We evaluate our backlog and the incentives currently available on the sales floor. We also have speculative inventory to manage and must remain competitive in certain markets. When we put together the guide, it was about considering all these elements. Moving some of that speculative inventory led us to the decision to slightly lower our guidance for the fourth quarter.

That's very helpful. I have a policy question. Does the shutdown affect your ability to offer mortgages or impact closings or any part of the home buying process?

To this point, no. Now there are certain loan programs that we don't use very often that are impacted. But for the shape and size of our business and the types of programs that we use, we've not been impacted to this point.

I wanted to follow up on the incentive comments and just talk a little bit more about the trajectory of incentives. Maybe you can elaborate on the order trends because you talked about kind of normal seasonality on orders traffic continuing into October. So relative to that 8.9% incentives in the 3Q closings, how did your incentives on orders trend through the quarter? And can you be more specific on what level of incentives is embedded in the 4Q gross margin guide?

Yes. I would tell you that incentives through the 3 months of the quarter were fairly consistent. As it relates to kind of the guide, I'd step back as we created the guide, I mean, there's about 1,000 homes that we have to kind of book and close within the quarter. So when we came up with the guide, we had to make assumptions about where we were going to sell them, when we were going to sell them. And so those all factored into it. So we haven't gotten that more granular, but we've assumed that as we move some of the spec inventory in the fourth quarter, we feel comfortable with the guide that we presented.

Got it. Okay. As a follow-up, I guess this edges into 2026 comments. But when you think about the 25.5% to 26% and your comments that spec mix is likely to remain at 50% for the next few quarters, just given the dynamics today, should we be thinking about if incentives are stable and spec mix is stable, that's kind of the baseline going into next year, understanding that you highlighted some of the tariff impacts as well, and then there are moving pieces around rates. But any comments you could provide on kind of how to think about beyond 4Q?

Yes. Mike, we'll hold on that. Like I shared when Mike Rehard asked the question, give us 90 days when we report Q4, we'll have full 2026 guidance for you and kind of break it all down.

So first, can you talk about where you are in terms of finished specs per community today and where you want that to be and how you're planning starts going forward?

Yes, Rafe, we currently have around 2,000 finished specs, which averages out to about 2 per community. This is nearly double the ideal amount we aim for. Ideally, we prefer to have slightly more than 1, around 1.2 finished specs per community. As I mentioned, we're above our target, partly due to the additional incentive load that Jim has discussed. While we are not overly concerned about our inventory position, we would prefer it to be lower for optimal performance. The pace at which we are starting new homes aligns well with our desired sales rate. We will continue to reduce the number of finished specs, and we believe that by 2026, we will normalize these figures and move back to the optimal ratio of finished specs to total specs in our inventory. Our focus will be on increasing built-to-order sales, which is the ideal approach for our business operations.

Great. That's helpful. And then when we look at the sort of SG&A guidance for the fourth quarter, it's a pretty wide implied range. Your sales are down year-over-year just because of the base you had from last year. I think like on the low end of the SG&A guidance, you have your levering, and then at the high end, you deleverage. What sort of gets you to the high end or low end of the range where you're able to leverage or not leverage? Like what are the puts and takes there?

As we look at it, I think our Q4 SG&A fairly consistent with where we are in Q3. We've got a wider range as it relates to our closing guide. As we said, we've got a lot of spec inventory that we're looking to move in the quarter. So that probably toggles it. But I would tell you, there isn't anything out of the norm that I would point to with our SG&A in the fourth quarter.

Just following up on an earlier question, what is the delay between lower historical or lower horizontal development costs and when that actually impacts the P&L? Is it two quarters? Is it three quarters? I'm not necessarily looking for guidance for 2026, but if you are seeing lower horizontal development costs, could that potentially serve as a favorable factor in lot cost inflation for 2026?

Land development generally runs 9 to 12 months, depending on the geography and the size of the phase that you're developing. So things we're developing right now in Q3, Q4 will have a favorable impact in the back half of '26 potentially and then kind of fully impacted in 2027.

That helps. And then switching gears, I just want to quickly touch on Del Webb/active adult. You're still building very large communities, but you're also building, say, smaller communities relative to what you might have historically. I'm looking at, I think, around 750 or so units at the midpoint. Does this at all kind of change the margin profile for Del Webb as you rebuild your pipeline of active adult orders? Just want to think about margin implications there.

We have been building communities of that size for about a decade. Our Del Webb business has been focused on that. We have fewer than five legacy communities that are older, very large Del Webb communities with over 2,000 or 3,000 units. However, there is nothing in our Del Webb business that is different from what it has been that would affect the margin profile of how those communities have historically performed.

Is thinking a little bit more about the regional variations that you mentioned in your remarks. It sounds like Texas and the West are especially tough relative to what you're seeing in the Northeast and much of the East Coast. When you think about those dynamics, are there different variables that you need to see in order to get some of those markets that are underperforming to come back? Is it all related to rates and jobs or other affordability? Or are there other factors that are going on at a local level that are influencing some of the differences you're seeing on the ground?

Yes, regarding Texas, there was an inventory buildup there after COVID, along with rapid price increases, and these factors have been affecting the Texas markets. However, we are seeing progress. Homes are still being sold, there are good job opportunities, and many people continue to want to live in Texas. Therefore, we believe we are at a pivotal moment and we're not overly concerned. In California, we're faced with a high-cost state that has many tech-dependent jobs. The uncertainties and challenges within the tech sector have influenced consumer confidence among buyers in those fields. Additionally, high prices and issues with affordability are contributing to the challenges in Northern and Southern California, and I would include Seattle in this category for many of the same reasons.

Yes. Okay. That's helpful. And then thinking about capital allocation, you obviously have a very strong balance sheet. The cash flows are healthy despite everything that's going on out there. Can you talk to your willingness to ramp shareholder returns or how you're thinking about priorities in general in terms of uses of cash?

Yes. Sue, we have a really thorough, detailed process for how we think about capital allocation. Our view is always to generate the best outcome for our shareholders, whether it's about capital allocation or the number of homes we're building or the amount of spec inventory that we're carrying. I mean, we really think about what's going to yield optimal return on invested capital. So we meet with our Board often, and they take a very active role in working with us as management to find the best outcome for capital allocation. We've been very consistent with share buybacks, and we've been very consistent in laying out our priorities that we want to invest in our business first and foremost. That's what our investors have charged us with. They've given us their capital to say, 'Go invest in your business, go grow your business.' We do that to the level that we believe generates great results. And then we think about returning excess cash that's being generated from successful operations in the business. And that's what we think about returning. Fortunately for us, over the last number of years, we've been able to do everything. We've invested in the business. We've grown our land pipeline. We've increased our dividend several times. We've paid down debt, and we've continued to be a consistent buyer of our own equity. So we'd like to continue to do everything, but we'll go through kind of the prioritization and the priority setting in that way—invest in the business, pay our dividend, return excess cash to shareholders.

Thanks for all the color, and good luck with the quarter.

Thank you.

Ryan, I think you talked about incentives generally. So Texas and the West, which Texas is a little more, right? There's 4 big markets there. So can you talk about perhaps the 8.9%, how that's distributed amongst the regions awaiting your Q. But also, if you could substitute the word you talked about consumer confidence — when we look at job growth, we see it half the long-term level in places like Dallas. I'd call that lack of jobs, which you obviously mentioned, but could you talk about how that is also impacting your buyer group, so active adult, let's say, Georgetown, Texas versus the entry-level? If you could add that dynamic.

Yes. So Ken, in terms of kind of the distribution of incentives, broadly, I would tell you there are less incentives in places like Florida and the Southeast, Northeast, and Midwest; more incentives in Texas and the West, which is totally distributed and aligned based on where things are harder to sell, and where things are easier to sell. Slicing it any thinner than that is probably more than we'd want to get into on this call. In terms of the Texas markets and slowing job growth, I'd probably not over-index on that. Dallas, in fact, all four Texas markets are places where population is growing and jobs are growing. As long as you have those two factors, you can and will have a thriving housing environment. And the Texas markets satisfy both those criteria. Growing jobs, growing population. So the fact that the rate of change is a little bit different, I probably wouldn't read too much into that just based on one period of slightly lower job growth.