Meritage Homes Corporation (MTH) Earnings Call Transcript & Summary

Greetings, and welcome to the Second Quarter 2026 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations and External Communications. Please go ahead.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our second quarter 2026 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2025 annual report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve?

Thank you, Emily. Welcome to everyone joining today's call. Today, I'll begin with a brief overview of market conditions and our second quarter results. Phillippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower-than-normal selling conditions, driving quarterly sales orders of 3,575, which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year with no meaningful sequential deterioration as average absorption pace of 3.5 net sales per month this quarter was in line with the 3.6 in the first quarter. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry level and first move-up price points. And we believe that our strategy of having sufficient available home inventory, combined with our growing community count positions us to quickly convert demand into sales this quarter from brief periods of rate relief. Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times and working down our finished inventory levels. These efforts generated 3,725 home closings and $1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6% and adjusted diluted EPS was $1.42, excluding $3.9 million of real estate inventory impairments and terminated land deal walkaway charges. As of June 30, 2026, book value per share increased 5% year-over-year. With that, I'll now turn it over to Phillippe.

Thank you, Steve. Our strategy of pre-started inventory, streamlined operations and go-to-market tenets enables us to be agile in our reactions to current market conditions. We leverage this strategy to generate additional direct cost savings to enhance our returns as incentives remain elevated this quarter. Our move-in ready homes and strong real estate relationships help us compete in an environment where the homebuyer values a quick close through clarity and certainty in the home buying process, while we continue to position the business for improved financial metrics by managing our WIP inventory. We successfully reduced our finished home position by over 1,100 homes year-over-year as we replace older inventory with an increased volume of new products with lower direct costs. At the same time, we have kept our cycle times sub-110 calendar days for the fifth consecutive quarter and even found a few more days of improvement, allowing us to start homes later while still supporting our 60-day closing guarantee. These shorter cycle times benefit our carry cost burden and improved liquidity while allowing us to respond quickly when stronger demand materializes. Our active community count of 340 as of June 30, 2026, was at 9% year-over-year and 1% lower than the 345 in Q1 due to timing with a few early closeouts and some delayed openings since July. Despite the small dip, we are reiterating our expectation of a 5% to 10% full year 2026 community count growth year-over-year. We also achieved another quarter of lower construction cost per foot as our purchasing teams collaborated with our strategic trades to find benefited all parties. We believe these long-term partnerships based on pre-started homes and limited SKU counts set us apart from our competitors by also providing certainty to our vendors. All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year-over-year to $357 million in the second quarter from $509 million last year, we continue to invest in our future communities, including the development needed to get our scheduled openings in the second half of 2026 and into 2027. We also returned $131 million this quarter to shareholders through dividends and share repurchases. By maintaining our operational and financial discipline, we believe we are well positioned to navigate uncertainty today while preparing for growth and increased shareholder returns as the market conditions improve. As part of that longer-term plan includes an intentional shift of the portion of our business to first-time move-up homes as we continue to serve one of our key buyer demographics, the millennial customer, as they begin to look toward their next home purchase, while still continuing to offer our entry-level products for Gen Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends. Our goal is to be around 1/3, 2/3 mix of first move-up and entry-level homes, consistent with the demographics of the U.S. population. We are intentionally rebalancing our portfolio to achieve that over time, starting with a heavier allocation to the acquisition of land for first move-up customers. Second quarter 2026 orders were 9% lower year-over-year, primarily due to a 19% decline in average absorption pace, which was partially offset by a 14% increase in average community count. Cancellation rate of 13% was a little higher than the 11% in Q1, but still remain below typical industry averages as we benefit from a quick sale to close process. Our average absorption pace was 3.5 homes per community per month during the second quarter compared to 4.3 a year ago and 3.6 in Q1. Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation. While our long-term objective remains an average of 4 net sales per month for the year, we will not sacrifice profitability or deplete irreplaceable lot positions by forcing absorptions through higher incentive usage in a highly competitive market where demand is relatively inelastic. ASP on orders this quarter of $385,000 was down 3% from prior year due to geographic mix shifting from higher ASP West region into the lower ASP East region. Although our incentive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per home incentive costs. We grew our active communities 9% year-over-year from 312 in the prior year to 340 by June 30. Q2 was 1% lower than 345 active communities in Q1 as timing played a factor this quarter. Our early closeouts occurred as we took advantage of pockets of stronger demand and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter and 67 year-to-date. In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during Q2, although very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back. We continue to see highly localized demand patterns with all regions encompassing markets of both strength and weakness in Q2, although the needed volume incentives varied notably. Parts of Texas, Southern California, Atlanta, Raleigh, and Coastal Carolinas were among our strongest performers, demonstrating more market strength in geographies with limited inventory. We also saw stronger demand across the markets when interest rates temporarily receded, providing some visibility into a potential path for recovery longer term. In contrast, in locations where affordability pressures or competitive conditions warranted a more measured approach, we deliberately pulled back on sales pace. Demand trends were softer in Orlando, Denver, Salt Lake City and Northern California. Now turning to Slide 6. Q2 starts totaled approximately 3,900 homes, down 4% year-over-year, yet up around 1,400 units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures. With nearly 60% of Q2 closings also sold during the quarter, our backlog conversion rate was 200%, reflecting our quick close strategy and within our target range of 175% to 200%. Our ending backlog was approximately 1,720 as of June 30, 2026, compared to approximately 1,750 homes as of June 30, 2025. As for the combined total of specs and backlog, we had around 6,800 units at June 30, 2026, 22% less than the approximate 8,700 specs in backlog we had at June 30, 2025, reflecting our intentional efforts to lower the inventory in light of current market conditions. We ended the quarter with approximately 5,100 spec homes, down 27% from approximately 6,900 specs in the prior year and up 7% sequentially from Q1. The 15 specs per store this quarter translated to about 4 months supply, intentionally near the lower end of our target 4- to 6-month supply due to today's demand environment and our improved cycle times. Comparatively, in the second quarter of 2025, we had 22 specs per store or 5 months of supply. We reduced our completed specs to 1,500 units in Q2, which was 42% lower than prior year and 30% of our total specs, our lowest percentage in 2 years and right around our target of 1/3. This compared to 38% in the prior year and 46% in the first quarter. Our balanced approach of reducing aged inventory and ramping up starts allowed us to end the quarter with the appropriate supply of homes per store. Although we are starting Q3 with lower backlog, we believe the spec home inventory provides us the path to achieve our Q3 guidance. With that, I will now turn it over to Hilla to walk through our financial results. Hilla?

Thank you, Phillippe. Let's turn to Slide 7 and cover our Q2 results in more detail. Second quarter 2026 home closing revenue of $1.4 billion was 14% lower than prior year due to 11% lower home closing volume and a 4% decrease in ASP on closings to $373,000. While both our closing volume and ASPs reflected our intentional decision to manage margin and pace, the decline in ASP was primarily due to geographic mix. To a lesser extent, product mix within our communities also impacted ASP with lower-priced homes outselling higher-priced ones and in certain markets where we had a greater amount of aged spec inventory, we used incremental incentives this quarter to sell those homes. With nearly 60% of our closings generated from intra-quarter sales, our results reflect real-time demand and incentive trends. During the temporary dips in rate this quarter, we sold and closed homes with lower cost incentives, which reduced our per home incentive burden. Looking ahead, incentive costs and utilization will continue to be inversely correlated to interest and mortgage rates, which remain highly volatile and in both domestic and international political developments. Home closing gross margin of 18.3% in the second quarter of 2026 was 280 bps lower than prior year's 21.1% as a result of loss leverage on lower home closing revenue and higher lot costs, both of which were partially offset by improved direct costs and faster cycle times. Second quarter 2026 home closing gross margin included $3.6 million of real estate inventory impairments and about $300,000 in terminated land deal walkaway charges compared to no impairment and $4.2 million in terminated land deal walkaway charges in the prior year. Excluding these charges, adjusted home closing gross margin was 18.6% and 21.4% for the second quarters of 2026 and 2025, respectively. We are encouraged that the volume of impairments remains relatively limited, and we are able to work through homes in most of our communities in slower demand markets at a lower but not impaired sales price. Our current land basis is primarily comprised of higher cost land vintages from the 2022 to 2025 time frame. Although this higher basis will continue to be a margin headwind in the near term, we anticipate some margin relief will start at the tail end of 2027 or early into 2028 as lower basis land begins to roll through our P&L, assuming the current impact from oil and gas price increases is not prolonged. In Q2, direct costs per square foot were down nearly 6% year-over-year, reflecting the disciplined purchasing and vendor negotiations Phillippe already covered with savings generated by both labor and materials. As we've noted, our newer starts should benefit from this lower cost basis and will be reflected in our margins in the second half of this year. Sequentially, adjusted gross margin improved 80 bps to 18.6% from 17.8% in Q1, driven primarily by better leverage on higher home closing revenue and improved direct costs from newer inventory. While we do not anticipate a significant gross margin recovery this year, our long-term target remains 22.5% to 23.5% under normalized market conditions where incentives and interest rates are more in line with historical averages. Selling, general and administrative expenses as a percentage of second quarter 2026 home closing revenue were 10.4% compared to 10.2% in the second quarter of 2025, as decreased compensation expense and an intentional reduction in discretionary costs nearly offset the lost leverage on lower home closing revenue. Despite the tougher sales environment, we did not increase sales and marketing spend on a per sale basis. Our long-standing realtor relationships continue to provide a competitive advantage, generating a consistent level of repeat business from our broker network. External commissions remained stable both year-over-year and sequentially, while our co-bro percentage continues to run in the low 90% range. We remain committed to growing our annual closing volume, which should drive operating leverage and support our longer-term SG&A target of 9.5%. The second quarter's effective income tax rate was 24.8% this year compared to 23.9% for the second quarter of 2025, due to higher state income taxes. As a reminder, we expect only a limited impact from the June 2026 expiration of the energy tax credits for the balance of this year and into the future as the higher construction requirements implemented in 2025 had already significantly reduced our eligible credits. Overall, lower home closing revenue and gross profit led to a 33% year-over-year decrease in second quarter 2026 diluted EPS to $1.37 from $2.04 in 2025. Adjusted diluted EPS for the current quarter was $1.42, excluding impairments and walkaway charges. To highlight the key results for the first half of 2026, on a year-over-year basis, orders were down 7%, closings were down 12% and our home closing revenue decreased 16% to $2.5 billion. Adjusted home closing margin of 18.2% was 350 bps lower than 2025 SG&A as a percentage of home closing revenue was 11% and net earnings decreased 46% to $146 million. Adjusted diluted EPS was $2.24 for the first 6 months of 2026, excluding impairments and walkaway charges. Before we turn to the balance sheet, it's worth noting that our customer credit metrics remain healthy and unchanged during the second quarter. FICO scores, DTIs and LTVs all track closely with historical averages, continuing the trend we've seen for several years. Lack of deterioration in customer credit quality validates that even in ongoing market volatility, consumer psychology continues to play a strong role alongside affordability concerns and home buying decisions. On to Slide 8. As of June 30, 2026, we maintained a healthy balance sheet supported by $807 million in cash, no outstanding borrowing under our credit facility and a net debt-to-cap ratio of 17.1%. Additionally, in June, we refinanced our revolving credit facility to increase the facility size to $980 million, extend the maturity from 2030 to 2031 and increase the accordion feature to permit a facility size of up to $1.47 billion. We are committed to supporting our long-term growth trajectory while prudently managing our capital structure and maintaining our investment-grade credit rating. As such, our net debt-to-cap ceiling remains in the mid-20s range. Our capital allocation strategy looks to balance both growth and shareholder returns. As we have been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $357 million in Q2. With lower demand, we are focused only on the most attractive land opportunities, increasing our land spend for first-time move-up communities and optimizing development schedules. Our forecasted land acquisition and development spend is expected to be between $1.7 billion and $2 billion for full year 2026. We returned $131 million of capital to shareholders via buybacks and dividends this quarter, up 74% from $76 million in the same period last year. We bought back over 1.5 million shares or 2.3% of shares outstanding at the beginning of the quarter for $100 million. We repurchased the shares this quarter at an average 16% discount to book. To-date, in 2026, we have spent $230 million on share buybacks, reducing our December 31, 2025 outstanding share count by nearly 5%. As of June 30, 2026, $284 million was available under the repurchase program. Given the instability of the current environment and with the path for interest rate trends remaining uncertain, we will continue to execute on our share repurchase commitment but pare it back slightly to a minimum of $55 million per quarter for the balance of the year while continue to increase that opportunistically, repurchasing incremental shares on cash flows and dips in our stock price. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $31 million and $63 million year-to-date. For the first half of 2026, we returned $292 million of capital to shareholders or 201% of our total earnings to date this year. Slide 9. In the second quarter of 2026, we secured nearly 1,700 net new lots under control, which is inclusive of the impact of about 300 terminated lots. These lots primarily reflect communities for 2028 and beyond as we own or control most of the lots we need to meet our community count targets through 2027. In the second quarter of 2025, we put nearly 1,800 net new lots under control. As of June 30, 2026, we owned or controlled a total of about 73,200 lots equating to 5.2 years supply of the last 12 months closings, slightly above our target of 4- to 5-year supply, but reflective of the upcoming community count growth we expect over the next 18 months. We also had approximately 15,300 lots that were still undergoing diligence at the end of the quarter, which is another potential 1-year supply in the pipeline that we can choose to control. We continue to target around a 40% option lot ratio. About 69% of our total lot inventory at June 30, 2026, was owned and 31% was optioned. This is essentially consistent with Q1, but slightly lower than the 66% owned and 34% option lot position in the prior year, reflecting our terminated lots in late 2025. We review off-balance sheet opportunities on a deal-by-deal basis on their financial merits as we do not believe every land deal can absorb the incremental cost of an off-balance sheet structure. Finally, I'll direct you to Slide 10. Based on current market conditions and year-to-date results, we are upping our guidance for full year 2026 home closings and revenue to around 5% below full year 2025 results, although home closing revenue could trend a bit lower if market conditions require higher incentives. For Q3 2026, we are projecting total home closings between 3,300 and 3,600 units, home closing revenue of $1.26 billion to $1.35 billion, home closing gross margin around 18%, an effective tax rate of 24.5% to 25% and diluted EPS in the range of $1.10 to $1.30. With that, I'll turn it back over to Phillippe.

Thank you, Hilla. In closing, we believe our second quarter results reflect solid execution in a softer demand environment. We also saw no meaningful deterioration in demand from the first quarter to the second quarter. Throughout this quarter, we remain focused on controlling what we can control, strategically reducing aged inventory as we target the right level of inventory per store, balancing pace and price and allocating capital thoughtfully to maximize returns. Looking ahead, with community count expected to grow in the second half of 2026, we believe we have the units to achieve our full year revenue guidance despite ongoing market challenges. Combined with our balanced approach to capital allocation, we believe Meritage is well positioned to navigate the current uncertain environment and deliver strong shareholder value long term. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

[Operator Instructions] And we'll take our first question from Trevor Allinson with Wolfe Research.

First one is on the better-than-expected gross margin in the quarter despite rates going higher. What drove the beat in the quarter? It sounds like maybe you're getting some better cost structure come through. Can you perhaps quantify those tailwinds in the quarter? And then should we expect incremental savings on the cost structure moving forward?

Thanks, Trevor. I'll take the gross margin question. So for us, it's a combination of a couple of things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition. But we also had that 6% year-over-year improvement on direct costs, which is helpful. And then also, we mentioned this, but because such a high percentage of our homes sell and close in the same period, there was a nice dip in interest rates in the middle of the quarter, where we were able to sell homes at a lower incentive and still close them in the same quarter. So we saw all of those benefits come together. Despite the higher lot cost that's still rolling through the financials, we were able to harness all of those benefits together and deliver that 18.6% adjusted gross margin. On a go-forward basis, I don't know that we're modeling continuing improvement. On direct margin, although the -- or on direct cost, I should say, but the savings that we've had so far should continue to push through the financial statement. So the rest of the gross margin for the balance of the year and into next year is really a discussion of volume of incentives and overall volume of closings.

Okay. Makes sense. And then the second question is on your shift back for a portion of your business more towards first-time move-up. I think from a demographic outlook by age cohort, that makes a lot of sense. What's the time line to make that shift? And is it still your expectation you're going to offer a 60-day guaranteed fully spec model in those homes? Or any changes to your go-to-market strategy as you serve a little bit higher-end buyer?

Yes, great question. It will take a little bit of time because we pivoted pretty meaningfully to entry level during the last 5 years. So as we pivot back to a more balanced 30% to 70%, it's really about sourcing some new land and bringing that land on the market. So more of a 2028 and beyond type of impact. And as it relates to the operating strategy, it's going to be pretty aligned with what we do as it relates to not offering choice and options, but we are going to tweak the go-to-market when it comes to when we release the homes. We'll probably be releasing the homes earlier because many of those folks have homes to sell. And so there will be some tweaks on sort of our focus around the closing ready guarantee as well as pieces of the realtor strategy.

We'll take our next question from Stephen Kim with Evercore ISI.

Just a follow-up on the shift. So I know you guys, when you first rolled out this very significant shift to the move-in ready homes, I mean it was something that you had spent a lot of time thinking about and preparing for. And so I just wanted to try to understand this pivot or tweak, let's say, to move a third back in the first-time move-up. Was this something that you always envisioned you would eventually do and maybe something has just precipitated or caused you to maybe advance that a little earlier. Or is there something that fundamentally has changed your thinking about the -- about maybe being 100% first time. And so this was not initially contemplated, but you are contemplating it now? And what, if so, what was that change or this thing that you've seen in the market?

Yes. It really was something we've already had always intended to be even when we rolled out our strategy 7 years ago and tweaked our strategy 4 years ago. We always believe that the second consumer segment for us was the first move-up. Someone is still looking for a move-in-ready home. Someone is still looking for a home that they can move in quickly, but buying their second home potentially buying their second new home potentially. So it's always been part of our strategy. What's really changed is fundamentally, the land market has changed, right? As land has gotten more expensive, prior, we could really underwrite a lot of entry-level land out there in the market, and we see more opportunities to source 1MU land, and that's really the change in the market. I think that's been just sort of something that's been happening over time. But this has always been part of our strategy, and now the land market is really lending itself to that opportunity.

I would add one more thing, Stephen. We talked a little bit about it in the script, but the shift in the age of the population cohorts in the U.S., millennials are the largest population cohort. So we were initially targeting our efforts towards that group. And as they were buying their first home, they were obviously an entry-level buyer. Here we are 10 years later, and they're ready to buy their next home. So we're continuing to follow the same demographic groups across their homebuyer journey. So obviously, as younger cohorts enter their home buying stage, they're continuing the entry-level push, but we're also following the millennial buyer and hopefully, we will be their first and second-time home provider.

Got you. Yes. Lots of interesting things there. So I guess just -- I guess, following up on that, Phillippe, you said that the land market, I guess, has gotten the first time move-up, and so you see some opportunities there. And you also indicated that this is something that you've contemplated even years in advance that you would eventually do this kind of pivot. One of those sounds opportunistic and could also change back, right, next year, like the land markets may become -- there may be less opportunity at first-time move-up and so forth. So I'm just trying to understand, how much of this is opportunistic in terms of the land strategy and opening up? And then how much of it is something that regardless of what the land market stratification looks like, you're going to -- you just think that this is the right time to move to that higher price point. And you have talked a lot about how the cycle time is reduced and it enables you to build more quickly. I just wanted to see if you could elaborate a little further on maybe some of the tweaks that you're going to make to your product if you're building a bigger product, it takes a little longer. I would think the customer maybe wants a little more personalization and things of that nature. Can you just like elaborate a little bit more on maybe some of the differences that you see in going after the 1MU customer again?

Yes. I mean probably 4 questions there, but let me try to answer them all. I think, first of all, this is not opportunistic. This is something that we've intentionally had as a goal of our business. But the market has been very different for the last 5 years. And so we've played in the market the way the land market supported. First-time land was much more available and priced correctly for the last 5 years. And now that bifurcation is starting to close and 1MU land is making more sense and it's more underwritable. Can that change? Certainly, it can change. We're always going to balance out the business between entry-level and first move-up based on the inputs in the business. But it's -- long term, our strategy is to be 1/3 1MU and 2/3 entry-level. Certain markets will allow us to do more of it and other markets will allow us to do less of it. So we're glad we have our regional and national footprint to kind of play in the market the right way. As it relates to the tweaks to our operating model, I really feel like it's like a tweak. It's a modification on the margin. We're not going to start offering design studios. We're not going to start offering a bunch of personalization. We're just going to build a nicer home. Homes that are 50-foot wide versus 40-foot wide don't necessarily take longer to build. You just build them the same way, but you might offer some nicer features. Maybe those buyers will get nicer cabinets, countertops, flooring to make sure we're delivering the right value to that customer because they're looking like you said, for their second home. So I don't see a big change in our kind of core operation strategy, but maybe some things on the margin that we will tweak to make sure we deliver the right value to that customer segment.

We'll take our next question from Alan Ratner with Zelman.

Thanks for all the details here. I won't beat the drum on the move-up pivot, but I'll just ask one quick question on that front. [ M&A ] has accelerated a bit across the industry. And I'm curious if you would consider M&A as an avenue to maybe accelerate that process towards building up the first-time move-up market share.

Yes. We're very encouraged to see that well-respected and smart long-term investors are investing in the homebuilding industry and really reinforcing the confidence in the sector that we have and the value of scale and repeatable platforms. We look at M&A in a very -- through a very strategic lens. It's not just about scale at any cost. It's about can we go out and acquire assets that will allow us to play in different markets or consumer channels. So 100%, I think if we were going to do any M&A at the local or private level, we'd be looking for some type of move-up penetration or to get into markets that we're not in that are currently performing well. There's a number of Midwest markets that seem really interesting right now. So for us, it's about a strategic add versus just incremental scale.

Got it. Makes sense. Second question, you made the comment about intra-quarter where rates briefly dipped that gave you an opportunity to maybe pull back a little bit on incentives. I just wanted to clarify, did you actually reduce the incentives you were offering? Or was -- were you kind of maintaining the same mortgage rate buydown programs that you were offering? It was just costing less to buy down to that rate given what was going on in the market. I just wanted to clarify, is there kind of an ability if we do see further moderation of rates to actually pull back more significantly on incentives or it was just a cost dynamic?

So it's tranche. So the first step in rates pull back a bit, it's a lower cost offering. We're not -- if we're offering 4.99, if the rate drop, we don't start offering 3.99. It's just costing us less to offer the same incentive because the differential to the interest rate is still significant, not that it's an interesting incentive. We have seen that when rates drop a second tick down, the utilization drops. So it kind of comes in waves. First, the cost per rate lock is lower and then the utilization shifts to a different type of discount, a more traditional discount in our sector. So it was great to see that when the market started to briefly return to normal, consumer behavior followed.

Yes. And I would just add that from a long-term perspective, with inventory levels being down and BTO builders now pivoting back strongly to BTO and out of spec, we're just the incentive environment. Now I can't predict what's going to happen with the economy and some consumer psychology things out there. But at least we don't see the incentive wars happening to the level that they were happening last year and into this year.

We'll take our next question from John Lovallo with UBS.