The following discussion and analysis of our financial condition and results of
operations are provided as a supplement to and should be read in conjunction
with the consolidated financial statements and related notes included elsewhere
in this Quarterly Report on Form 10-Q as well as our audited consolidated
financial statements and related notes included in our Annual Report on Form
10-K for the year ended December 31, 2021.
Our home sales revenues increased 16% and 17% for the three and nine months
ended September 30, 2022 over the comparable prior year periods, respectively,
while our gross margins increased 360 bps and 390 bps, respectively, over the
same periods. These results were driven by increases in selling prices in
response to robust consumer demand in 2021 and early 2022 when the majority of
the homes closed in the three and nine months ended September 30, 2022 were
placed under contract with the customers. However, the strength of new home
demand has progressively declined during 2022 as the Federal Reserve increased
benchmark interest rates in response to inflation, which, in turn, drove
national mortgage and other interest rates higher, impacting home affordability
and consumer sentiment. These increases in interest rates, along with ongoing
high inflation, disruptions related to the conflict in Ukraine, and other
macroeconomic factors, have tempered new home demand in all of our markets. As a
result, net new orders declined 28% and 23% in the three and nine months ended
September 30, 2022, respectively, compared with the prior year periods. Our
order backlog at September 30, 2022 remained high relative to historical levels,
but decreased 11% and 5% in units from June 30, 2022 and December 31, 2021,
respectively. These decreases in backlog were driven by the aforementioned lower
new orders, combined with an increasing cancellation rate, which increased to
24% in the three months ended September 30, 2022, compared to 10% in the
comparable prior year period.
Supply chain constraints that began after the onset of the COVID-19 pandemic
have continued to limit the availability of certain materials and construction
labor, which, combined with delays in municipal approvals and inspections,
continue to pressure production cycle times of the homes we are constructing.
The time required to construct a home was approximately seven weeks longer in
the third quarter of 2022 as compared with the prior year period and
approximately one week longer than the second quarter of 2022. The noted supply
chain and labor issues have led to significant cost pressures in almost all
areas of our business, but especially related to construction labor and
materials. In 2021 and the first half of 2022, we were able to increase pricing
to offset the majority of such cost increases, but pricing will be significantly
more challenged in the near term given the lower demand for new homes.
In response to the significant shift in market conditions in 2022, we have
slowed the pace of our housing starts, have increased sales incentives, and are
taking additional pricing actions in many of our communities. We are updating
the underwriting for each of our land option contracts prior to buying
additional land and have recently made decisions to walk away from a number of
land option agreements, which resulted in write-offs of deposits and
pre-acquisition costs totaling $24.5 million in the three months ended September
30, 2022. We will be working with our trade partners to update the costs for
materials, labor, and services to reflect current market conditions and will
adjust our overhead cost structure as necessary to align with demand. We expect
that the more challenging environment for new residential housing will continue
through at least 2023 and will result in lower revenues and profitability during
those periods. Despite these conditions, there remains a housing shortage across
the United States, and we are confident in our ability to navigate this
environment and to position the Company to take advantage of opportunities as
they arise.
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