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Ironically, the very backlog that has stymied construction will bode well for the fourth quarter and next year, he explained: “These results reflect the strength of our company, our larger scale and the size and composition of our backlog. At the end of our third quarter, our backlog stood at over 10,700 homes valued at more than $5.2 billion, placing us in a good position with respect to deliveries in our 2022 fourth quarter and into the first half of 2023.”
Rob McGibney, executive vice president and chief operating officer, acknowledged the attendant challenges of an inflationary climate as reflected in the earnings report: “We continue to face difficulties in completing and delivering homes in the third quarter,” he said. “And as a result, we were short about 160 deliveries, or 4%, relative to the midpoint of the guidance that we provided in June. While we had seen build times improve modestly in May, which we shared with you on our last earnings call, they extended significantly from that point, illustrating the larger industrywide challenge in finding a consistent footing in build times.”
Things like altered construction schedules were emblematic of the current economic challenged, McGibney noted: “During the third quarter, build times for our homes under construction expanded by 11 days from the framing stage to completion. This drove the delivery miss in the quarter and is also having an impact on our fourth quarter delivery projection, which we have reduced. There were several factors that contributed to this extension. Building material shortages continued to delay the completion of homes.”
Mezger buttressed the point in speaking of housing activity: “Net orders of 2,040 were down relative to a strong 4,085 in the year-ago third quarter,” he said. “At the start of the third quarter, given the size of our backlog and with only 69 finished homes available for sale, we made the decision not to chase sales. The quarter unfolded with June’s average weekly gross orders coming in softer than May’s. July’s gross orders held consistent with June’s, and we then experienced an acceleration in gross orders in August. We had taken steps in July with respect to pricing in some underperforming communities, while at the same time, mortgage rates had declined slightly since June.”
Mercurial interest rates – rising and falling as the Federal Reserve attempts to tame inflation – loomed large in affecting quarterly results for the company, Mezger added: “We were pleased with the activity in August. But following Labor Day, interest rates have again risen, and we’ve experienced a softening orders trend. We will continue to monitor market dynamics and individual community performance and we’ll adjust pricing as necessary to maintain the balance between preserving our backlog and achieving minimum absorption rates to optimize each asset. Over the years and throughout cycles, we have typically generated one of the highest sales rates per community in the industry, and that remains our objective going forward.”
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