Key facts
- M/I Homes reported that 78% of its second-quarter sales were from speculative homes.
- The company's total sales increased by 15% year-over-year in the second quarter.
- Gross margins for M/I Homes decreased to 22.0% from 24.7% in the same period.
- M/I Homes is employing incentives such as mortgage-rate buydowns and closing-cost assistance.
- The builder aims to reduce the time from a buyer's decision to home delivery by focusing on spec homes.
M/I Homes is pursuing a contrarian strategy by prioritizing speculative home sales, even as the broader housing market becomes more cautious. In the second quarter, 78% of the company's sales came from spec homes, contributing to a 15% year-over-year increase in total sales. However, this approach has led to a decline in gross margins, which fell to 22.0% from 24.7% in the prior year.
The company is utilizing incentives such as mortgage-rate buydowns, closing-cost assistance, and price concessions to drive demand and maintain sales velocity. While these incentives are impacting margins, M/I Homes views its spec-heavy model as a competitive advantage by shortening the time between a buyer's decision and the delivery of a finished home. This speed-to-home strategy offers buyers certainty in an uncertain market, potentially stabilizing sales.
M/I Homes' financial calculations suggest that the increase in gross profit dollars, despite a lower margin percentage, could be economically rational. This is further supported by potential benefits like faster inventory turns and greater purchasing leverage. The company is also exploring an asset-light finished-lot strategy, which could reduce capital tied up in land and further enhance returns by allowing for faster capital redeployment.
While the current strategy is effective in generating sales, the reliance on incentives is seen as a temporary measure. The long-term goal is to transition to a model where incentives are incremental rather than essential, supported by disciplined land acquisition, efficient architecture, and faster construction cycles.