Weekly Real Estate News
Summary
Meritage Homes' third-quarter orders fell 15% to 3,083 homes, despite a 7% increase in its average community count. Closings declined 14%, revenue from home closings dropped 17%, and net earnings fell 32%. The builder reduced land investment nearly 40% to $329 million as mortgage costs and incentives pressured margins.
Meritage Homes sold fewer homes in the third quarter despite operating more communities, another sign that a wider selection of new houses has not been enough to overcome buyers’ monthly-payment concerns.
The Scottsdale, Arizona-based builder took orders for 3,083 homes during the three months ended September 30, a 15% decline from a year earlier. Orders fell even as the average number of communities open for sale increased 7%, according to the company’s October 28 earnings release and its SEC-filed earnings exhibit.
Meritage said the average sales pace per community dropped 21%. Its order price averaged $383,000, down 2%, reflecting a combination of geographic mix and greater use of sales incentives, including mortgage-rate buydowns. A lower reported average price does not establish that every model or market experienced a price reduction.
The company closed 3,187 homes, 14% fewer than a year ago. Home-closing revenue declined 17% to $1.16 billion, with the average closing price falling 4% to $365,000. Quarterly net earnings dropped 32% to $67.8 million, or $1.04 per diluted share.
Profitability was squeezed from several directions. The home-closing gross margin narrowed to 17.4% from 19.1%, as incentive and lot costs rose and lower revenue provided less leverage over fixed costs. Excluding specified impairment and terminated-land-contract adjustments, Meritage reported an adjusted home-closing margin of 17.9%, down from 20.1% a year earlier. Those adjusted figures are non-GAAP measures and should not be confused with the reported margin.
Executive Chairman Steven Hilton said rising mortgage rates and affordability pressure weighed on consumer sentiment. Management chose to protect margins rather than pursue a faster sales pace at any price, a choice visible in both the order count and its land budget.
Land investment fell nearly 40% from the prior year to $329 million. Meritage finished September with $677 million in cash and no borrowings on its revolving credit facility, while reporting net debt equal to 18.9% of capital. That liquidity provides room to adjust construction plans, although it does not guarantee a recovery in buyer traffic.
Chief Executive Phillippe Lord said the builder converted nearly 190% of its beginning backlog into closings during the quarter. The comparison describes the relationship between closings and the backlog carried into the period; it does not mean that nearly twice as many homes were sold as were available.
Meritage ended September with 1,611 homes in backlog, 5% fewer than a year earlier. The backlog was valued at $637 million, also down 5%. Its operating footprint averaged 348 communities during the quarter.
The results add another perspective to the pressure evident in recent WRE News coverage of Century Communities and Green Brick Partners, which also reported weaker pricing or margins. Builders’ responses differ, but the trade-off between incentives, order volume and profits is becoming more visible in the quarterly reports.
Meritage’s next test is whether the lower land spending and larger community base can support cash flow while buyers remain sensitive to financing costs. The company has not claimed that demand has reached a bottom, and its quarterly results do not provide a national forecast for home prices.
