Michael Dahl: Right.
Operator: We’ll take our next question from Alan Ratner of Zelman and Associates. Your line is open.
Alan Zelman: Hey guys, good morning. Thanks for the info so far. Switching gears a little bit, I guess what I’d like to hear your opinion on is maybe what opportunities could potentially come about from this recent, I guess, softening or choppiness that you’re describing. Your balance sheet is obviously in fantastic shape, so is pretty much the rest of the public industry, but we are hearing anecdotes of AD&C capital tightening up for private operators and land developers, and we’re hearing build-for-rent deals potentially falling out of favor here. Have you started to see any increase in either distressed or opportunities that you feel like you might be able to take advantage of, if these current conditions persist for a handful of quarters?
Ryan Marshall: Yes Alan, I think we’re hearing the same things that you are, particularly on maybe availability of capital or the cost of capital on the land development side. There’s definitely, I think, some strain or tightness in that arena. I think that certainly might continue to create an opportunity the longer that we stay in a high rate environment. I think it’s also a great opportunity for us to take market share. With our mortgage company, the size of our balance sheet, the ability to be active in the capital markets, I think it gives us an opportunity to do things that smaller local builders and maybe private builders can’t, so I think there is certainly a market share opportunity there as well. We’ve made build-to-rent a small piece of our business.
We’ve got good relationships with national partners that we’re building some percentage of our annual deliveries for those operators, and I think we’ve talked extensively about that, that it will continue to be an arrow in our operational quiver. Look – I’m really, really confident and pleased with the way we’re operating. The health of the business, the volume that we’re selling in kind of the core operations, and then when you go to the balance sheet, I think we’re set up to do a lot of great things that will continue to set us up for success down the road.
Alan Zelman: That’s helpful, Ryan. Then I guess other builders have kind of put out an absorption target that they manage their business to, that tends to be maybe more the spec guys, entry level, where volume is certainly more of a consideration. But I’m curious, when you think about your price outlook and your margin profile and where your incentives are currently running at, right now you’re absorption pace is you’re probably going to be in the mid-2s somewhere. Is there a level where, if that pace dips below, that you would get much more aggressive on incentives, discounts, and even adjust base prices again? What would that level look like?
Ryan Marshall: Yes Alan, it’s a good question. The thing that I talk about with our operators, and I spend a lot of time in the field in our communities, in our division offices talking about exactly this, the mantra that we have inside the company is a minimum of two sales in every community. Now, certainly we have certain price points in communities that sell way more than two per community, but as a production homebuilder, it’s hard to have an active store that does less than two, you just–you know, you can’t make the returns work to the level of our expectations. Below two per active community, that’s where we start looking at, hey, we are positioned right, do we have the right incentives, do we have the right pricing, do we have the right product, are we going after the right consumer? There’s a number of those levers that we pull, but it nets out to for this quarter, we were 2.5, but that two per community is kind of the level that we look at.
Operator: We will take our final question from Truman Patterson with Wolfe Research. Your line is open.
Truman Patterson: Hey, good morning everyone, and Ryan, the screaming baby sale got me – I think that kid’s probably in high school or college by now.
Ryan Marshall: We’re going to the way-back machine, Truman.
Truman Patterson: Exactly, exactly. You all–I’m trying to understand, your orders for entry level were performing well in the third quarter – I think you said up, like, 53% year-over-year, but then you mentioned some more cautious commentary about that buyer. I’m just hoping maybe big picture, if you could help us think through the monthly incentives needed for that buyer cohort versus you mentioned active adult, maybe move-up, more affluent, not needing quite as much. I’m just hoping you can help us just kind of understand these bigger trends that you’re seeing near term.
Ryan Marshall: Yes Truman, look, I think we’re really pleased with what our first-time business is doing. We’ve invested in it, and we’ve said our target was to get it to kind of 40% of our business, and we’ve done that. I think you’ve seen not only growth in absorptions but growth in communities, and the business is about where we’d like it to be. On one hand, that buyer doesn’t have a home to sell, they’re not locked into a low interest rate that they’re reluctant to get rid of, so I think that’s the positive with that first-time buyer. In terms of the headwinds, I think it’s obvious – it’s 8% interest rates, and that’s a buyer that’s got a down payment, hopefully, either they’ve saved it or it’s been gifted to them by parents, and then they’re going and getting a 30-year mortgage and they’re working on what they can afford based on their wages.
The good news is wages are going up, which is helping affordability, but beyond rate-rate-rate, there’s probably not a bunch more that I could add in terms of the first-time buyer. Maybe just the last thing on the overall rate environment, look, high rates aren’t good for the consumer, they’re not good for housing, they’re not good for the broader economy, but we’re all kind of playing in the same environment and with the quality of the management team that we have and the way that we’re operating this company, I think we’ve proven that we’ve got the tools and the operational flexibility to be successful in any environment. This most recent quarter is a great example of that.
Truman Patterson: Okay, perfect. Then Ryan, you mentioned adjusting product given the higher rates. I’m hoping you could elaborate on what all that entails for Pulte specifically. Then if I’m reading between the lines, spec sales were about 49% of your overall bucket this quarter – that’s a pretty good run rate that you all expect going forward?
Ryan Marshall: Yes, so in terms of product, Truman, the one great thing about our product portfolio is we offer a lot of flexibility to scale up, scale down. We offer structural options that allow a smaller floor plan with added square footage in the form of loft or additional flex space. We’ve got the ability to take a base floor plan, scale it up or scale it down, and we’re seeing buyers use that flexibility to help address some of the affordability challenges that are out there. In our–the way that we sell options, we see buyers pick the things that they see value in, and we’re also seeing buyers make trade-offs in terms of how they spend those dollars, in terms of cabinets, countertops, upgrades, etc. The last piece of your question, Truman, remind me again?
