The overall US housing market remained strong in the first quarter and registered continued growth in new home demand and pricing, driven primarily by: an extremely limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, positive demographic trends, along with low unemployment levels and resulting wage growth. These improvements occurred despite a significant increase in mortgage interest rates during the period. The rising cost of housing, inflation in the broader economy, and increases in mortgage interest rates have placed additional pressure on overall housing affordability. However, while affordability has become more challenged, the cost of new housing continues to compete well with the cost of rental housing. In the current environment, we continued to experience strong demand for our products in the first quarter of 2022. While new orders were 19% lower than the prior year period, the decrease was driven primarily by a 7% reduction in community count in combination with Company actions to strategically manage the pace of sales to better align with current production levels. As a result, our order backlog increased 5% in units and 31% in dollars as of March 31, 2022 over the prior year period.

Due to the increasing level of new homebuilding activity in the US, coupled with impacts on the US supply chain and construction and municipal workforces due to the COVID-19 pandemic, the availability of certain materials and construction labor, combined with delays in municipal approvals and inspections, have elongated the production cycle of the homes we are constructing. While we are working with our supply partners, have significantly increased our speculative housing starts, and have hired additional construction and customer service employees, our production cycle times have extended in substantially all of our markets. The time required to construct a home was approximately eight weeks longer in the three months ended March 31, 2022, as compared with the prior year period and approximately one week longer than the fourth quarter of 2021. Due to these supply chain and labor challenges, we are moderating lot releases and the pace of new orders in the majority of our communities in order to balance sales volume and production capacity to reduce backlog durations as well as to protect gross margins in the face of inflationary cost pressures. Despite the production challenges in the current operating environment, we were able to achieve closing volume consistent with last year. We believe these conditions will continue to impact our industry for the remainder of 2022.

The noted supply chain and labor issues are also leading to significant cost pressures in almost all areas of our business, but especially related to construction labor and materials. Specifically, the cost of lumber continues to be extremely volatile and remains elevated compared to historical norms. Additionally, the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged. We also continue to experience significant challenges with the cost and availability of windows, siding, and appliances, among other supply categories. To date, we have been, and believe we will continue to be, able to increase pricing to offset the majority of such cost increases due to expected ongoing high consumer demand.

Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic, or its related impacts on overall economic conditions or the global supply chain, will last. As a result, the unpredictability of the current economic and public health conditions will continue to evolve. The unpredictability of current economic conditions will also continue to evolve due to disruptions occurring as a result of the military conflict in Ukraine and related sanctions or other actions against Russia imposed by the U.S. and other countries. However, all of our operations continue to function at effectively full capacity subject to health and safety protocols, and we remain optimistic about future housing demand and our ability to continue expanding our business. Due to the strength of current demand and extending municipal entitlement timelines, the number of our active communities decreased in 2021 as we sold out communities at a pace faster than we opened new ones. We have increased our investments in land acquisition and development and expect that the number of our active communities will begin to increase as we proceed through 2022.


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