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Homebuilder PulteGroup ramping up housing construction as demand recovers

Homebuilder PulteGroup (PHM) announced plans this week to increase its pace of new builds in 2023, aiming to match an anticipated increase in demand in the market.

“Our plan is for a consistent cadence of new starts,” Ryan Marshall, Chief Executive Officer at PulteGroup said on the company's earnings call Tuesday.

“Combining our planned starts with our 18,000 homes currently in production, we expect to have a production universe that will allow us to close approximately 25,000 homes in 2023,” Marshall added.

The Atlanta-based homebuilder posted quarterly results that topped expectations, with earnings per share coming in at $3.85 against $3.63 expected by analysts, according to data from Bloomberg.

Revenue in the quarter totaled $5.17 billion, in-line with consensus expectations for $5.17 billion.

PulteGroup shares rose more than 9% on Tuesday following this report.

The company reported net new orders of 3,964 homes, a 41% dip for the same period last year. The decline underscores the “ongoing softness” in buyer demand that was crippled by higher interest rate hikes last year, which led to a deeper pullback during the period.

Separately, by buyer group, fourth quarter orders to first-time buyers declined 28% to 1,574 homes, while move-up buyer orders by 56% to 1,241 homes, and active adult buyers declined 36% to 1,149 homes.

In the fourth quarter, the cancellation rate was 32%, up from 11% in the previous year. In addition, cancellations as a percentage of backlog at the beginning of the quarter totaled 11% in the final quarter compared to 4% in the fourth quarter last year.

"While demographics, supply dynamics and the overall financial benefits of home ownership keep us confident about long-term demand, Federal Reserve actions to fight inflation through higher interest rates continued to impact homebuying demand in the quarter," Marshall said in the company's earnings release.

Hill Street Studios via Getty Images

The homebuilder reported a backlog of 12,169 homes valued about $7.7 billion, down from last year’s backlog of 18,003 homes with a value of $9.9 billion.

“Our objective is to keep inventory turning, which requires that we start an appropriate number of homes,” Robert O’Shaughnessy, PulteGroup's CFO, said on the call.

In the final quarter of 2022, the company started construction on about 4,000 homes, down 50% from the same period last year, and ended the quarter with a total of 18,103 homes in production.

Among that inventory, 10% of homes were finished, while new homes being built on spec totaled 43% of those under construction, slightly above target. Given the production pipeline, the homebuilder expects to deliver between 5,400-5,700 homes in the first quarter of the year, O’Shaughnessy said.

In the first quarter, the company expects average sales price to close between $565,000 to $575,000. This would be an increase of 12% compared to the same period last year.

The company didn’t offer guidance for the full year given the current market dynamics, but expects in its first-quarter results to deliver gross margins of 27%, boosted by lower lumber prices.

With rates easing from recent highs, buying a home has become slightly more affordable. Moreover, home price appreciation continues to moderate, as home prices rose 7.7% in November from the previous year, a pullback from October’s increase of 9.2%, according to a seasonally adjusted data of national prices from S&P CoreLogic Case-Shiller.

PulteGroup continues to offer incentives that include rate buy-downs, lower lot premiums, or even price reductions to gain traction among buyers. Despite adjusting their incentives, the company has started to introduce smaller floor plans in some of their communities to lower prices and associated costs.

“We're currently seeing buyers respond to lower rates and better pricing, but what happens as Fed actions weaken the employment picture is uncertain,” Marshall said.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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