M.D.C. Holdings, Inc. (NYSE:MDC) Q3 2023 Earnings Conference Call October 26, 2023 12:30 PM ET
Company Participants
Derek Kimmerle – Vice President and Chief Accounting Officer
Larry Mizel – Executive Chairman
David Mandarich – Chief Executive Officer
Bob Martin – Chief Financial Officer
Conference Call Participants
Stephen Kim – Evercore
Andrew Azzi – JPMorgan
Alan Ratner – Zelman & Associates
Truman Patterson – Wolfe Research
Ken Zener – Seaport
Alex Barron – Housing Research Center
Operator
Hello and welcome. Please hold for Mr. Derek Kimmerle, VP and Chief Accounting Officer. Please go ahead.
Derek Kimmerle
Thank you. Good morning, ladies and gentlemen and welcome to M.D.C. Holdings’ 2023 third quarter earnings conference call. On the call with me today, I have Larry Mizel, our Executive Chairman; David Mandarich, Chief Executive Officer; and Bob Martin, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com.
Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to M.D.C.’s business, financial condition, results of operation, cash flows, strategies and prospects and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company’s actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company’s actual performance are set forth in the company’s third quarter 2023 Form 10-Q, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.
And now, I will turn the call over to Mr. Mizel for his opening remarks.
Larry Mizel
Thank you for joining us today. As we go over our results for the third quarter of 2023 and provide an update on our company’s outlook, M.D.C. generated strong profitability in the third quarter, posting net income of $107 million or $1.40 per diluted share. We closed 1,968 homes at an average sales price of 552,000, resulting in home sales revenues of $1.1 billion. We expanded our gross margin from home sales by 280 basis points on a sequential basis to 19.2%. We also ended the quarter with $1.8 billion in cash and marketable securities, which gives us financial strength to make significant investments in our business and pay our industry-leading dividend of $2.20 per share on an annualized basis.
We continue to experience solid demand trends in the third quarter despite the rise in mortgage rates as we generated a net absorption pace of 2.4 homes per community per month. The lack of existing home supply, coupled with our ability to offer financial incentives has attracted more buyers to the new home market and has resulted in market share gains for the publicly traded homebuilders. We believe this dynamic will remain in place for the foreseeable future and have a number of sales tools at our disposal to drive traffic to our communities and address affordability concerns.
From a macro perspective, we continue to see positive data points that bode well for our industry. GDP continues to grow at a healthy rate defying expectations of an economic slowdown. The latest Nonfarm Payroll report showed that U.S. employers added 336,000 jobs in September, well above economic expectations and home prices remain resilient nationally, according to the Case-Shiller Index, which was up 1% year-over-year in its most recent reading and up 6% since their low in January. While these positive economic trends may compel the Federal Reserve to keep rates higher for longer, they provide a solid foundation for our industry and give consumers the ability and confidence to move forward with their home purchases.
In light of this positive economic background, M.D.C. has been focused on investing in our homebuilding operations in an effort to grow our local market presence. Land acquisition activity was up sharply in the third quarter and we expect to continue this trend in the fourth quarter. Our focus continues to be on the more affordable segments of the market, which is where we expect to see the strongest demand in the foreseeable future.
Our balance sheet remains in great shape, with a quarter end debt-to-capital ratio of 31.2% and more cash at marketable securities than our senior notes outstanding. We also have a favorable debt profile, with no senior notes due until 2030 and a weighted average cost of the debt of those senior notes of 4.3%. Thanks to an easing in supply chain constraints and a shift to more spec home production, our inventory turns have improved and our cash balance has grown. Maintaining a strong balance sheet has always been a core principle of our company and this remains true today.
With a favorable industry outlook and attractive product portfolio and a strong balance sheet, M.D.C. is well positioned to finish 2023 on a strong note and carry this momentum into the new year. We had over 2,700 homes and backlog at the end of the third quarter and another 2,681 homes completed or under construction, which puts us in a great position to hit our delivery goals for the fourth quarter.
Our homebuilding operations are located in some of the fastest growing markets in the country and we plan to grow our presence in these markets through our ongoing land acquisition efforts. We are excited about the new community openings we have planned for the coming quarters and look forward to them as we draw closer to next year’s spring selling season. We made progress on a number of fronts in the third quarter and I am proud of how our team have executed through the first 9 months of this year.
With that, I’d like to turn the call over to David who will provide more detail on our operations this quarter.
David Mandarich
Thanks, Larry. Order trends were consistent across our homebuilding platform during the third quarter. As the absorption pace in the West Mountain and East regions all came in at 2.4 net sales per community per month. The gross order trends followed a typical season pattern with July coming out as our best month followed by a slowdown in August and a rebound in September. We continue to favor a more spec-driven operating model during these times as it allows us to better utilize financing incentives, lowers the probability of cancellations and caters to the needs of the first time homebuyer.
During the third quarter, nearly 80% of our gross sales were for spec homes. We plan on maintaining a healthy level of spec home production through the end of the year to ensure we have a sufficient inventory for the spring selling season. Our gross margins from home sales excluding impairments, was 19.7 for the third quarter, demonstrating our ability to generate healthy margins in a rising mortgage rate environment. As of the end of the third quarter, the average gross margin on homes and backlog were similar to the homes that we closed in the third quarter. So, we expect that homes sold and closed in the fourth quarter will likely carry higher interest.
Financing incentives continue to be the most effective tool in addressing buyers affordability concerns and serve as a very competitive advantage over the existing home market. We continue to see healthy traffic in our communities and in our website. A sign that buyers remain motivated to own a home provided they can find something that fits their budget. Through rate buy-downs and closing cost assistance, we can lower the monthly payment and upfront costs for our homebuyers.
Overall, I am pleased with our company’s performance this quarter and our outlook as we head into the end of the year. New home demand has proven to be resilient in the face of rising interest rates. Thanks to the adjustments we have made to our sales process and our business model. The time to build and deliver a home is down considerably from the beginning of the year allowing us to turn our inventory faster and more efficiently. We also believe the inherent competitive advantage we and other public homebuilders have over smaller builders is strong due to the high cost of capital. As a result, we are very optimistic about the near and long-term outlook for the company.
With that, I’d like to turn it over to Bob who will provide more detail on our financial results this quarter.
Bob Martin
Thanks, David and good morning everyone. During the third quarter, we generated net income of $107.3 million or $1.40 per diluted share, representing a 26% decrease from the third quarter of 2022. Pre-tax income from our homebuilding operations for the quarter was $127.4 million, which represented a 24% decrease from the third quarter of 2022. This decrease was primarily due to a decline in home sale revenues as a result of lower closing volume as well as a 350 basis point decrease in gross margin from home sales year-over-year. Despite the decline in home sale revenues, we did benefit from a 70 basis point improvement year-over-year in our total SG&A expense as a percentage of home sale revenues.
Our financial services pre-tax income for the quarter was $12.4 million, which represented a 29% decrease from the prior year quarter. Decrease was primarily due to lower closing volume within our homebuilding operations as well as the impact of special financing programs offered during the quarter. Both our homebuilding and financial services pre-tax income benefited from increased interest income during the quarter. On a consolidated basis, we recognized $22.9 million of interest income during the third quarter compared with only $22.9 million in the third quarter of 2022.
Our income tax expense of $32.5 million for the third quarter represented an effective tax rate of approximately 23%, a slight increase from 22.3% in the prior year quarter. We continue to expect our effective tax rate for the full year to be roughly 23%. This estimate does not include any discrete items or any potential changes in tax rates or policies.
We delivered 1,968 homes during the quarter, which was in line with our previously estimated range for the quarter of 1,850 to 2,000 closings. Homes closed during the quarter had a construction build time of approximately 200 days, which was a significant improvement on both a year-over-year and sequential basis. We expect build times to continue to trend that down based on the projected build times of our homes under construction. As a result of these cycle time improvements, we converted 41% of our homes in beginning inventory, excluding model homes and home closings in the third quarter. In addition, with our increased focus on spec production, 26% of our closings were both sold and closed within the quarter. We currently anticipate deliveries for the 2023 fourth quarter of between 2,200 and 2,400 homes, which at the midpoint would bring our full year closings to over 8,100 homes.
The average selling price of homes delivered during the quarter decreased 6% year-over-year to $552,000. The decrease was driven by increased incentives, changes in base pricing and a shift in the mix of closings from Colorado to Arizona. We expect the average selling price of homes delivered in the 2023 fourth quarter to be between $545,000 and $555,000.
Gross margin from home sales for the quarter was 19.2% compared to 22.7% in the third quarter of 2022. Excluding inventory impairments, gross margin from home sales for the quarter was 19.7% compared to 24.7% in the prior year quarter. This decrease was largely driven by an increase in incentives year-over-year, changes in base pricing and to a lesser extent higher construction costs year-over-year. On a sequential basis, gross margin from home sales for the quarter improved by 280 basis points. Excluding inventory impairments, gross margin from home sales improved 210 basis points from the second quarter of 2023. This improvement was the result of lower construction costs, along with lower incentive levels. As David mentioned, we do expect incentive levels to increase on home sold and closed in the fourth quarter, due to the most recent move higher in mortgage interest rates. As a result, we are currently expecting gross margin from home sales for the 2023 fourth quarter of between 18% and 19.5%, assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2023 third quarter was $101.3 million, which represented a decrease of $40.1 million from the prior year quarter. This decrease was primarily driven by our general and administrative expenses due to a decrease in stock based compensation expense, and to a lesser extent, decreased salary and bonus expenses. In the prior year quarter, we recognized $50 million of expense related to equity awards granted during the quarter. Equity awards granted during the current year quarter were performance based and as such no expense will be recognized for performance metrics are probable of achievement.
The decreases in commissions, and selling and marketing expenses were the results of the decrease in home closings year-over-year. We currently estimate that our general and administrative expenses for the fourth quarter of 2023 will be between $50 million and $55 million. The dollar value of our net orders increased 532% year-over-year to $965 million driven by an increase in gross orders and cancellation activity that has returned to more normal levels. Gross orders for the third quarter of 2023 were 2,227 which is a 42% increase from the prior year quarter. Our cancellation rate for the third quarter of 2023 was 24% of gross orders. This compares to more elevated levels during the prior year quarter. As we worked through our backlog of built order homes.
The average sales price of our net orders for the third quarter of 2023 was $570,000. On a sequential basis, this represented a 2% increase from the second quarter of 2023. This increase was a result of base price increases taken during both the second and third quarters of this year in the majority of our communities. Our active subdivision count was at 235 to end the quarter, up 7% from 220 a year ago. Looking at the graph on the right, the number of sooner to be active communities continues to exceed the number of sooner to be inactive communities at September 30, 2023.
During the third quarter, we required 1,190 lots resulting in total land acquisition spend of $159 million and incurred $83 million of land development costs. This represented a significant increase in land acquisition from the first half of this year. As already mentioned, we expect this trend to continue in the fourth quarter, as indicated by our land approval activity during the quarter. During the third quarter we approved 2,347 lots for acquisition, which was our highest level since the first quarter of 2022. More importantly, exceeded the number of homes closed during the quarter, which allowed us to increase our controlled lot supply on sequential basis.
We ended the quarter with 22,353 lots controlled. Additionally, we had 6,448 lots in various stages of due diligence that still require approval by our asset management committee prior to being reflected within our controlled lot count. We ended the quarter with nearly $1.8 billion of cash and short-term investments, total liquidity of over $2.9 billion. And no senior note maturities until January 2030. Our debt-to-capital ratio at the end of the quarter was 31.2%. And our cash and short-term investments continue to exceed our homebuilding debt as of quarter end.
We started 2,383 homes during the third quarter of 2023, representing a 162% increase over the prior quarter. As a result, excluding model homes, we ended the quarter with 5,266 homes in inventory. This included 2,681 spec homes, 89% of which have been curated by our Home Gallery design professionals. In addition, our inventory of completed spec homes remains low, representing less than 5% of our home’s inventory at the end of the third quarter.
With our pivot to building more spec homes, along with the overall improvement in supply chain conditions, we have seen a meaningful improvement in our ability to turn our inventory. On a trailing 12-month basis our working process inventory turnover, improved 13% year-over-year to 2.1x our home cost of sales. We expect to drive further improvements in this metric in the near-term as we continue to leverage our curated spec production model.
In summary, our current backlog and inventory curated spec homes puts us in position for a strong end to 2023 and provides us the opportunity for year-over-year increases in home sale revenues and pretax income to start 2024. Well, the most recent increases in mortgage interest rates will likely remain a headwind in the near-term. Our ability to buy down homebuyers mortgage interest rate, and offer closing cost assistance remain very effective incentives to address affordability concerns.
In terms of capital allocation, we remain committed to our industry leading dividends and reinvesting in and growing our homebuilding operations. While we make significant progress with our land acquisition and approval activity during the third quarter, growing our land pipeline remains a top priority to position us for growth in future periods.
That concludes our prepared remarks. I will now turn the call back over to the operator to start our Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question comes from Stephen Kim from Evercore. Steven, please go ahead.
Stephen Kim
Yes, thanks very much, guys. Appreciate all the color. I just wanted to get. Just as a housekeeping item. Bob, can you reiterate what you said for the number of specs you had at the end of the quarter? And how many of those were finished?
Bob Martin
I believe the number was about 2,681. For total specs, and the number that was finished, I think was right around 250 as of the end of the quarter.
Stephen Kim
Okay, got it. Alright. And if we have that, okay, so you’re still – you’re running at about 11 – little over 11 specs per community. But not much more than one finished spec per community. So that’s, is this a level that you’re – do you feel like you’ve sort of arrived at kind of an optimal level of specs, or do you actually want to take that higher as you get into the spring selling season?
Bob Martin
Yes, I think your math is right. It’s about 11 per active community. Once you include those communities that are just starting up and not yet active, it’s probably closer to call it 9.5. All that said, I do think it could rise a little bit more between the end of the third quarter and the start of the year as we prepare for this spring selling season. We’re also working on making sure that we have good sufficient inventory that is, within call it 60 to 90 days of close for the spring selling season as well. So that is ongoing.
Stephen Kim
Yes, that’s great. Remind us, where do you stand now in terms of the gross margins on your specs versus build to order?
Bob Martin
I think, overall for this specs build-to-order is about 200 basis points higher that said, the curated specs are actually closer to direct margins to the build-to-order margins. What’s influencing it in the quarter right now is that we still had quite a few unintentional specs, so specs that resulted from cancellations still going through the numbers.
Stephen Kim
And I think you said your curated spec percentage has gone up to be quite a high, like 89% or something.
Bob Martin
Correct, that 2,681 total 89% are curated.
Stephen Kim
Okay. And those, those margins are closer to build-to-order that’s encouraging. Okay, lastly just incentives, you touched on incentives as you know – as you talked about 3Q. But as we look into what’s happening sort of at the end of the quarter and into October. Which curious as to if you could give us a sense for what you’re seeing either in terms of a change in your posture towards incentives or because customers interest in finance incentives, particularly buy downs relative to what you maybe saw for the 3Q is a whole?
Bob Martin
I think it definitely increased a bit the overall cost of offering those special financing incentives, those buy downs towards the end of Q3, given that we’ve seen some movement in rates, the rates seem to settle down a little bit during Q2, only to come up again. So anytime we see that, I think it’s normal to see an increase in the incentives offered, especially in this case for the special financing incentives. So as David mentioned, we do expect a higher level of incentives to come through in Q4 because of that many of the units that are getting that special financing will close in the fourth quarter.
Stephen Kim
Okay, that’s helpful. Then right, because they’re basically standing, it’s okay, quick move ins. Great. Well appreciate it. Thanks very much guys.
David Mandarich
Good day. Thank you.
Operator
And our next question comes from Michael Rehaut from JPMorgan. Michael, you may proceed.
Andrew Azzi
Hi, this is Andrew Azzi on for Mike. Congrats on the quarter guys.
David Mandarich
Thank you.
Andrew Azzi
I just wanted to ask maybe if you can break out the components that drove the gross margin be and maybe what was the biggest driver in the respective impact?
David Mandarich
Well, I think overall just the closings. That we’re running through the at a lesser level of incentive in part that’s due to interest rates being a bit more stable towards that the middle part of the year. So a lesser cost from financing incentives. Although that that turned a little bit as Steve, Kim and I were just discussing towards the end of the quarter, so that’s one thing. I think we also had some pickups with relation to things like for example lumber due to our build-to-order strategy that we were executing on for much of the prior years, we still had some of the older, lumber costs going through our numbers and that really started to come down in a more meaningful way during Q3.
Andrew Azzi
Got it. That’s helpful. Thank you. And then in terms of 4Qs gross margin guidance, what kind of gets you to the bottom and top of the range that you guys provided?
Bob Martin
Well, I think it will depend on what we see in market conditions during Q4 that relates not only to the overall psyche of the consumer, the health of the consumer, but also what interest rates do during the fourth quarter. I imagine if for whatever reason you saw continued increase in mortgage interest rates. That would result in more incentives in order to get that rate down to a level of affordability for the consumer. If you saw stability or even a move down, maybe there is an opportunity to be towards the higher end of the range.
Andrew Azzi
Thanks a lot for that. Appreciate it. That’s all I have.
Operator
And our next question comes from Alan Ratner and Zelman & Associates. Alan, please go ahead.
Alan Ratner
Hey, guys. Good afternoon. Thanks for taking my questions. If I look back to a year ago, a 1.5 year ago, when rates initially began to rise, you guys were, one of the more aggressive builders and kind of slowing the pace of land buying down, you took actions to obviously make sure that you wouldn’t kind of get stuck with land being purchased at the peak prices and whatnot. And while I hear a little bit of near-term cautiousness in your guidance at least as far as margin is concerned than the potential need for higher incentives given this more recent move in rates. It seems like you’re taking the opposite course in terms of actually accelerating land activity and keeping the start pace of specs quite high. So I was just wondering if you could talk through a little bit why you feel more confident in the market’s ability to kind of withstand the headwinds now that seems to be unfolding whereas some other builders might be, taking a bit more of a cautious tone compared to a 1.5 year ago when you were, seemingly very conservative in the face of initially rising rates.
Bob Martin
Well, it’s a great question. And as we’re operating a year ago, naturally it was very daunting. We had a cancellation rate, I believe close to 80% and that was the result of a very sharp increase in interest rates. I think some 300 basis points over the course of 6 months, whereas this year, even though rates continue to increase, it’s a more modest increased 100 to 150 basis points during the course of the year. So, I think that the consumer is not being shocked as much this year, which is encouraging. We continue to see good activity each month, which is helpful. We see good traffic, good conversions, the traffic is quality traffic and we really still across all of our markets, don’t see a ton of supply out there in terms of inventory that is available for consumers to buy. So we think that all adds up to a pretty healthy spring selling season if we have another healthy spring selling season. Then, of course, we will need to replace that land. So even though the level of land activity has moved up quite a bit from Q1 or Q2, Q1 and Q2 were really not really significant periods of land acquisition activity at all. So we’re almost getting back to more in Q3, just a normal run rate for land acquisition and then future periods for land acquisition will really be based upon the continued good solid activity that we see in the market.
Alan Ratner
Great. I appreciate the thoughts there, Bob. Second question, just thinking through, the sensitivity, I guess you guys have on a price versus volume side. You mentioned an expectation for a tick up and incentives in the fourth quarter. I think a lot of your peers are saying the same thing. The big difference between you guys though and them is your margins are a bit thinner, so presumably a little bit less cushion to absorb and more meaningful increase in incentives here with margins kind of in the high teens. So how do you think about that trade off? At what point either from an absorption standpoint or sales standpoint, would you get much more aggressive on incentives and at what point would you go back and say, we’re not going to discount anymore because our margins are at a point where we don’t want to go below that?
Bob Martin
I think in Q4 you have the impact of seasonality. So we have to take that into account. There’s only so many buyers out there buying as we approach the holiday season, but we want to be competitive. So we are looking at our competition, how many there are selling and what price it takes, to sell, there is another end to the equation. Certainly, the margin is one thing, but the velocity with the inventory turns certainly is important as well. So we want to strike a balance. We don’t want to go down to next to nothing kind of sales. Because we know that is something that is demoralizing to our teams, to our sales teams, certainly, so that wouldn’t be appropriate as well. So if we see that we’re keeping up with really a good seasonal pace, I think that’s a good guide for us, although there’s no absolute. We’ve got to look at it subdivision by subdivision and making sure we’re remaining competitive. I guess, I would also add just given our land supply being amongst the lowest in the industry, that’s really something that insulates us as well not having so much pressure on us to monetize land, at any given point in time.
Alan Ratner
Got it. Appreciate the thoughts. Thanks a lot.
Operator
[Operator Instructions] Our next question comes from Truman Patterson from Wolfe Research. Truman, please go ahead.
Truman Patterson
Hey, good afternoon, everyone. Thanks for taking my questions. First one, just want to understand what you’re seeing on the land front, specifically given some of the tightening and lending to the private builders and developers, are you all actually finding any finished lots come to market, just a general update on kind of land pricing and really trying to understand when you’re underwriting a deal today. What level are you able to underwrite to from a gross margin perspective, should we be thinking something in kind of the high teens?
Bob Martin
I guess I’ll start off by saying we were fortunate that the majority of what we bought and what we approved, we were finished lot deals during the quarter in fact, I think it was close to 80%. So, we have seen some finished lot deals. It is competitive out there for deals, generally speaking. So, I imagine there won’t be nearly as many in the future. From an underwriting standpoint, the 2020 rule still applies in terms of margin and IRR. Although I would say for something that truly is finished, where you are taking all that development risk off the table, and you can actually start building houses immediately, you would go into the high-teens for that kind of deal, potentially. So, all depends on the deal. But right now, most of the deals that we have done during the quarter are ones that can add closings in sales relatively quickly.
Truman Patterson
Got it. Understood and thanks for that. This is a little bit near-term focus, but could you give an update on kind of October demand trends and then maybe perhaps go across some of your metros or regions just given the recent rate move, which areas have been relatively outperforming or underperforming would be helpful?
David Mandarich
So, for October, I think October has been healthy considering seasonality. It’s really in line with normal seasonal patterns. And we think it’s moving along very well, so that’s October. In terms of regional focus, it’s interesting to see a 2.4 absorption rate for every one of our regions for the third quarter. And I think it speaks to the resilience of all the markets. There are markets out there where we know the consumer base maybe is a bit more credit challenge. I think you see some of that in Phoenix. You see some of that in Orlando, for example, Las Vegas. So, those are areas that typically have a sensitivity to affordability. That said, I think we have been able to manage through it with our special financing programs, and offering closing costs and those kinds of programs. So, I don’t know that there is any one location that strikes me as particularly impacted or disproportionately impacted.
Truman Patterson
Okay. Great. Thank you all and good luck in the coming quarter.
David Mandarich
Thank you much.
Operator
And we will proceed with a question from Ken Zener from Seaport. Ken, please go ahead.
Ken Zener
Hello everybody.
David Mandarich
Hi Ken.
Ken Zener
So, you guys like in the interest income I take it the $20 million this quarter, is that fair to rate, just to think about going forward, all else being equal?
David Mandarich
For now, certainly it ties to where interest rates move more broadly speaking. And of course, we are hoping to invest some of our capital into additional homebuilding assets to bring those cash balances down maybe just a smidge. So, those are the two factors. But right now, it seems like we are going to continue to earn a healthy rate.
Ken Zener
Yes, a good rate, finally. So, you have a more spec bias. Things are more seasonal, is what that you are seeing. Yet your starts exceeded your orders in 3Q. Could you talk about that decision as it relates to the fourth quarter or and then perhaps more broadly, you are thinking about that strategy?
David Mandarich
Yes, the starts during Q3 were just shy of 2,400. So, that did easily exceed our net orders. And I think we are thinking about spring selling season and making sure that we have the right amount of inventory for spring selling season. With rates being where they are still at recent highs, decades highs, at this point, we know it’s still going to be pretty important for our consumers to be able to know what their interest rate is at the time they buy their houses, at least for the majority of consumers. And I think that means specs, so we want to have that inventory in place to end the year. So, that’s why you see the differential.
Ken Zener
Do you – and I have a couple of follow-up questions here, because that does make sense. Do you think and others could chime in, given the perspective about the interest rate, your shift to back which makes sense. Was that something that was experienced, let’s say in the late ‘70s, David. And yes, that’s my first question. I have a couple here for you. So, I apologize.
David Mandarich
Well, actually, if you have got to the Jimmy Carter years, Larry and I experienced mortgage rates that were 17 to 18. And at that time, we did forward commitments that were 13.5. So, this is – this seems like a pretty good market compared to when Carter was President.
Ken Zener
Well, related to that, one of the things, the dollar bottomed in I believe October ‘78. But home prices were exceeding inflation then. And there is obviously a variety of housing price metrics out there. If you consider them in the low-single digits, one of the differences now is that prices aren’t appreciating on a real basis. Do you have any context for how that influenced – influences buyers, because I know it was one of the big carriers in the past to explain, sure, you had to pay a lot of mortgage, but prices were appreciating faster than that, so it’s kind of a moot point in my opinion?
David Mandarich
It is what happened in the late ‘70s was a lot. What’s happening today, there was actually a shortage of houses. And so not only…
Ken Zener
On the new side, tied to capital or on the…
David Mandarich
New side, and we are in a different time today, because if you think about, we are competing for home sales with other builders, but what’s interesting is you have so many people that are on the sidelines, because they have a mortgage rate under 4. And so you got a lot of people having 16 houses, they are living at home. So and as you well know, the new home builders are now picking up a bigger percentage of home sales that was kind of filled by the re-sales.
Ken Zener
Yes. I think there is a lot of parallels, some of them are good and unfortunately, some of them are bad. I am going to circle back now to the start question. This will be my last one. Because even if you are holding – well, your inventory units, let’s get this right, were down 15%, year-over-year, so about 5,300 if you back out bottles and such. And if you start what you have orders for, do you think your orders are going to be up sequentially? That would be very odd, I guess. But given – yes, so anyways, your inventory units are poised to be up nicely year-over-year, call it, 4,500, maybe even 5,000 units and if inventory using your 20-10-10 example, if you close out at about 5,000 units based on your start decision that would imply up to 10,000 units next year. Could you talk to why that logic applying your 20-10-10 would not be appropriate, or what would be wrong with that simplistic approach to your inventory, as the forward indicator next year? Thank you.
David Mandarich
It’s a loaded question for sure. With a lot of a lot of facts, but I think I know where you are going with it. And that we – really, if you look at inventory, right, yes, when you look at our starting inventory, I think we calculate over time, it’s been a 2:1 ratio closings versus that starting inventory excluding models. So, if we do end up in that north of 5,000 number to end, the year, Senate gives us the opportunity for a higher unit volume year in 2024. Of course, that depends on making sure that the cycle times are continuing to improve, they don’t revert back that we have all the land necessary. And I think we have done a lot of good activity to get there. So, your line of thinking certainly makes sense, when backed up by cycle times that are improving inventory that’s turning faster, more generally speaking.
Ken Zener
Yes, I just think it’s – I mean builders don’t know about the back half of ‘23. But you certainly know about, I mean ‘24, but you certainly know the front half of ‘24. And that inventory unit is pretty impressive what the implications are. Thank you.
David Mandarich
Thank you.
Operator
And I will proceed with a question from Alex Barron from Housing Research Center. Alex, please go ahead.
Alex Barron
Yes. Thank you. Yes, I was curious if you guys happen to have the statistics for what your average buyer looks like in terms of average income, average FICO, average down payment, and what the average interest rate is, either in your recent closings or in your backlog?
David Mandarich
I think the average FICO was 744, the average down-payment or I guess that backwards, the average LTV was 82%. And the most recent interest rates, so for those closings that occurred in Q3, we were at about 6% for our mortgage company. I am not sure if I have the income number handy.
Alex Barron
Okay. Maybe we can touch offline. Yes. Because the income would be interesting to know, just to see, relatively speaking, because it’s one thing to think the average household is buying a home. It’s another if it’s the upper quintile buying the home these days, so I will just be curious to know what your average household income that’s buying, actually is.
David Mandarich
Just for one point of reference was about 42%. So, that is in line with what it’s been in prior periods.
Alex Barron
Got it. And in terms of rate buy down or forward commitment, roughly what are you guys advertising and how many of the people buying are actually going for a rate buy down rather than some other type of incentives?
David Mandarich
Right now we are at 5.75% on government and 5.99% on conventional. And I would say the vast majority of the buyers are using rate to some degree or closing cost incentives to either get their payment down or to get their initial cost to close down. But as you can tell from the 6% average in Q3, not everybody is getting all the way down to 5.75% or, or 5.99%.
Alex Barron
Right. Okay. Thanks so much and best of luck.
David Mandarich
Thank you.
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin for any closing remarks.
Bob Martin
Thank you to everyone for being on the call. We look forward to speaking with you again after the release of our Q4 earnings.
Operator
And the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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