Q3 2024 DR Horton Inc Earnings Call
Participants
Jessica Hansen; Senior Vice President - Communications and People; DR Horton Inc
David Auld; Executive Vice Chairman of the Board; DR Horton Inc
Paul Romanowski; President, Chief Executive Officer, Director; DR Horton Inc
Michael Murray; Chief Operating Officer, Executive Vice President; DR Horton Inc
Bill Wheat; Chief Financial Officer, Executive Vice President; DR Horton Inc
Joshua Chan; Analyst; UBS Investment Bank
Carl Reichardt; Analyst; BTIG
Stephen Kim; Analyst; Evercore ISI Institutional Equities
Michael Rehaut; Analyst; JPMorgan Chase & Co
Matthew Bouley; Analyst; Barclays Bank PLC
Alan S. Ratner; Analyst; Zelman & Associates LLC
Eric Bosshard; Analyst; Cleveland Research Company LLC
Samuel Reid; Analyst; Wells Fargo Securities, LLC
Anthony Pettinari; Analyst; Citi
Buck Horne; Analyst; Raymond James
Susan Maklari; Analyst; Goldman Sachs Group, Inc.
Rafe Jadrosich; Analyst; BofA Securities
Michael Dahl; Analyst; RBC Capital Markets
Presentation
Operator
Good morning, and welcome to the third quarter 2024 earnings conference call for D.R. Horton, America's Builder, the largest builder in the United States.(Operator Instructions) Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton.
Jessica Hansen
Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the third quarter of fiscal 2024.
Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements.
Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release can be found on our website at investor.drhorton.com, and we plan to file our 10-Q early next week. After this call, we will post updated Investor and supplementary data presentations to our Investor Relations site on the Presentations section under News and Events for your reference. Now I will turn the call over to David Auld, our Executive Chairman.
David Auld
Thank you, Jessica, and good morning. Before we discuss our results, I wanted to take a moment to pay tribute to our founder, Don Horton, who passed away in May. Don was an incredible man with an unstoppable drive and work ethic and establish the foundation and culture of our company, D.R. Horton, the company would not exist as it does today without Don's tireless pursuit to help as many Americans as possible, achieve the dream of home ownership.
This simple mission has driven us from the first home that Don built built sold and closed himself more than 45 years ago through the more than 1 million homes for our company has provided for families across the country. We are thankful for Don and all D.R. Horton employees are beneficiaries of his life's work. Along with our homeowners, customers, contractors, suppliers, land sellers, real estate brokers and everyone else not included in this family.
It is a bittersweet to be talking about the company's results for the first time since his passing. Not a great pride in the company's growth, profitability and shareholder returns, which have been at the top of all public companies in America for the past decade. We will work every day to preserve this legacy and continue to build upon to improve our operations and the value of our company. We would also like to thank the countless people who contacted us to share their condolences and memories. We received hundreds of messages from employees across the country, and we heard from many industry leaders, citizens of other homebuilding companies.
Our suppliers lot developers, bankers and so many more on behalf of Don's family and our company, we thank you for the kind words and tributes to a remarkable man. He will be missed. Now I'll turn the call over to Romanowski, our President and CEO.
Paul Romanowski
Thank you, David, for sharing those words and sentiments about Don, on behalf of all of us at D.R. Horton. In addition to David and Jessica, I am pleased to also be joined on this call by Mike Murray, Executive Vice President and Chief Operating Officer, and Bill Wheat, Executive Vice President and Chief Financial Officer.
For the third quarter, the D.R. Horton team delivered solid results, highlighted by earnings of $4.10 per diluted share, which was an increase of 5% from the prior year quarter. Our consolidated pretax income increased 1% to $1.8 billion on a 2% increase in revenues to $10 billion with a pretax profit margin of 18.1%.
During the nine months ended June 30, we generated $972 million of cash flow from our homebuilding operations and consolidated cash flow of $228 million. Our homebuilding return on inventory for the trailing 12 months ended June 30 was 29.5%, and our return on equity for the same period was 21.5%.
Although inflation and mortgage interest rates remain elevated, the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season was good despite continued affordability challenges.
With 42,600 homes in inventory and an average selling price of approximately $380,000. We are well positioned to continue consolidating market share. Our average construction cycle times are back to normal and improved from the second quarter, driving additional improvement in our housing inventory turns. We remain focused on enhancing capital efficiency to produce consistent sustainable returns and to increase our consolidated operating cash flows so that we can return more capital to shareholders through both share repurchases and dividends.
Mich?
Michael Murray
Earnings for the third quarter of fiscal 2024 increased 5% to $4.10 per diluted share compared to $3.90 per share in the prior year quarter. And net income for the quarter of just $1.4 billion on consolidated revenues of $10 billion. Our third quarter home sales revenues increased 6% to $9.2 billion on 24,155 homes closed compared to $8.7 billion on 22,985 homes closed in the current. Our average closing price for the quarter was $382,200, up 2% sequentially and up 1% from the prior year quarter. Bill?
Bill Wheat
Our net sales orders for the third quarter increased 1% from the prior year to just over 23,000 homes and order value was flat at $8.7 billion. Our cancellation rate for the quarter was 18%, up from 15% sequentially. And flat with the prior year quarter.
Our average number of active selling communities was up 3% sequentially and up 12% year over year. The average price of net sales orders in the third quarter was $378,900, which is flat sequentially and down 1% from the prior year quarter. To address affordability, we are still using incentives such as more mortgage rate buydowns. And we have reduced the prices and sizes of our homes where necessary. Although our home sales gross margin improved sequentially this quarter, incentives are elevated and we expect them to remain near these levels, assuming similar market conditions and no significant changes in mortgage rates.
Jessica?
Jessica Hansen
Our gross profit margin on home sales revenues in the third quarter was 24%, up 80 basis points sequentially from the March quarter. Our gross margin was better than expected, primarily due to lower incentive costs than in the second quarter. On a per square foot basis, home sales revenues were up 2% and stick and brick costs were down 1% in the quarter, while log costs increased approximately 2.5%.
For the fourth quarter we expect our home sales gross margin to be similar to the third quarter. Further out our home sales gross margin will continue to be dependent on the strength of new home demand changes in mortgage rates and other market conditions.
Bill Wheat
In the third quarter, our home-building SG&A expenses increased by 12% from last year. And homebuilding SG&A expense as a percentage of revenues was 7.1%, up 40 basis points from the same quarter in the prior year. Fiscal year to date, home-building SG&A was 7.5% of revenues, up 30 basis points from the same period last year, due primarily to the expansion of our operations, including new markets and an increased community count. We will continue to control our SG&A while ensuring that our platform adequately supports our business.
Paul Romanowski
We started 21,400 homes in the June quarter and ended the quarter with 42,600 homes in inventory, down 3% from a year ago. 26,200 of our homes at June 30 were unsold 8,800 of our total unsold homes were completed, of which 990 had been completed for more than six months. For homes we closed in the third quarter. Our construction cycle times improved slightly from the second quarter, bringing us below our historical average cycle times are faster. Construction and housing turns allow us to manage our homes and inventory more efficiently. We plan to maintain a sufficient starts pace and homes in inventory to meet demand while remaining focused on improving capital efficiency.
Michael Murray
Our homebuilding lot position at June 30 consisted of approximately 630,000 lots, of which 24% were owned and 76% were controlled through purchase contracts. We remain focused on our relationships with land developers across the country to maximize returns. These relationships allow us to build more homes on lots developed by others of the homes. We closed this quarter 64% were in a lot developed by either forced or third parties. Our capital efficient and flexible lot portfolio is a key to our strong competitive position. Our third quarter home-building investments in lots, land and development totaled $2.5 billion. Our investments this quarter consisted of $1.4 billion for finished lots, $750 million for land development and $340 million for land acquisition.
Paul Romanowski
In the third quarter, our rental operations generated $64 million of pretax income on $414 million of revenues from the sale of 790 single-family rental homes and 610 multifamily rental units. We continue to operate a merchant built model in which we construct purpose-built rental communities and sell them to investors. Our rental operations provide synergies to our homebuilding business by enhancing our purchasing scale and providing opportunities for more efficient utilization of trade labor and land parcels.
Our rental property inventory at June 30 was $3.1 billion, which consisted of $1.1 billion of single-family rental properties and $2 billion of multifamily rental properties. We expect our total rental inventory to remain around the current level for the next several quarters.
Jessica Hansen
Forestar, our majority owned residential lot development company reported revenues of $318 million for the third quarter on 3,255 lots sold with pretax income of $52 million. Forestar's owned and controlled lot position at June 30 was 102,100 lots, 63% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. $270 million of the finished lots we purchased in the third quarter were from Forestar. Forestar had approximately $745 million of liquidity at quarter end with a net debt to capital ratio of 18.7%.
Our strategic relationship with Forestar is a vital component of our returns-focused business model for our homebuilding and rental operations. Forestar, strong separately, capitalized balance sheet, growing operating platform and lot supply positioned them well to capitalize on the shortage of finished lots in the homebuilding industry and to aggregate significant market share over the next several years.
Michael Murray
Financial Services earned $91 million in pretax income in the third quarter on $242 million of revenues resulting in a pretax profit margin of 37.7% during the third quarter, essentially all of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 78% of our buyers. FHA and VA loans accounted for 56% of the mortgage company's volume. Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 7.5 and an average loan to value ratio of 88%.
First-time homebuyers represented 57% of the closings handled by our mortgage company this quarter, though our balanced capital approach focuses on being disciplined, flexible and opportunistic to sustain an operating platform that produces consistent returns, growth and cash flow. We have a strong balance sheet with low leverage and significant liquidity, which provides us with the ability to adjust to changing market conditions.
During the first nine months of the year, our consolidated cash provided by operations were $228 million, and our homebuilding operations provided $972 million of cash. At June 30, we had $5.8 billion of consolidated liquidity, consisting of $3 billion of cash and $2.8 billion of available capacity on our credit facilities. Debt at the end of the quarter totaled $5.7 billion with $500 million of senior notes maturing in October, which we expect to refinance. Our consolidated leverage at June 30 was 18.8%, and we plan to maintain our leverage around or slightly below 20% over the long term.
At June 30, our stockholders' equity was $24.7 billion and book value per share was $75.32, up 18% from a year ago. For the trailing 12 months ended June 30, our return on equity was 21.5%, and our consolidated return on assets was 14.8%.
During the quarter, we paid cash dividends of $0.3 per share, totaling $99 million, and our Board has declared a quarterly dividend at the same level to be paid in August. We repurchased 3 million shares of common stock for $441 million during the quarter. Our fiscal year to date, stock repurchases through June increased by over 60% from the same period last year to $1.2 billion, which reduced our outstanding share count by 3% from a year ago. Based on our strong financial position and expectation for increased cash flows, our Board recently approved a new share repurchase authorization totaling $4 billion.
Jessica Hansen
For the fourth quarter we currently expect to generate consolidated revenues of $10 billion to $10.4 billion and homes closed by our homebuilding operations to be in the range of 24,000 to 24,500 homes. We expect our home sales gross margin in the fourth quarter to be around 24%. And homebuilding SG&A as a percentage of revenues to be approximately 7%. We anticipate a financial services pretax profit margin of around 35% in the fourth quarter, and we expect our quarterly income tax rate to be approximately 24% to 24.3%.
For the full year of fiscal 2024 we now expect to generate consolidated revenues of $36.8 billion to $37.2 billion and expect homes closed by our homebuilding operations to be in the range of 90,000 to 90,500 homes. We continue to expect to generate approximately $3 billion of cash flow from our homebuilding operations in fiscal 2024.
Finally, we now plan to repurchase approximately $1.8 billion of our common stock for the full year. In addition to annual dividend payments of around $400 million, we plan to provide guidance for fiscal 2025 in October when we report our fourth quarter earnings and after we've completed our annual budgeting process with our operators. We expect to be positioned to increase our market share further next year. We also expect to generate increased cash flow from operations in fiscal 2025, which we plan to utilize to increase our returns to shareholders through proportionately higher share repurchases and dividends.
Paul Romanowski
In closing, our results and position reflect our experienced teams, industry-leading market share, broad geographic footprint and focus on affordable product offerings. All of these are key components of our operating platform to sustain our ability to produce consistent returns growth and cash flow while continuing to aggregate market share. We have significant financial flexibility and we plan to maintain our disciplined approach to capital allocation by providing consistently high returns to our shareholders to enhance the long-term value of our company.
Thank you to the entire D.R. Horton, family of employees, land developers, trade partners, vendors and real estate agents for your continued efforts and hard work.
This concludes our prepared remarks. We will now host questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Joshua Chan, UBS.
Joshua Chan
Morning, guys. Thanks for taking my questions. The first one is your absorptions were somewhat worse than normal seasonality would suggest. I know there's been some noise in normal seasonality over the past few years, but margin was 50 basis points above the high end of your outlook at 24%. So I guess the question is, did you guys focus more on profitability per home versus maintaining the sales pace maybe as rates rose in April and along those lines, absorptions tend to decline in, call it 15%, maybe a little bit more percent quarter over quarter in the fourth quarter. How are you thinking about kind of the seasonality in the fourth quarter?
Paul Romanowski
Yes, John, we continue to balance price and pace to drive the returns that we're looking for a community-by-community. We saw choppiness through the quarter and demand as you saw fluctuation in interest rates, and we responded accordingly. And we did did maintain incentives, but didn't lean in too hard. And I think that's where you saw the result in the overall sales pace, but still feel good about our position about the backlog we have and the opportunity to perform on our guidance for the full year.
Joshua Chan
Got it. Now is a good outcome. And then maybe next question is in the Southeast which you obviously encompasses Florida and South Central, which is Texas and its orders were a little bit lighter than what we were looking for. And I think when we spoke in the quarter, Paul, it seemed that the pickup in existing home inventory in those markets was characterized as more of a normalization than a clot. And I think the thought was that the age of the existing housing stock and the price points just weren't that competitive with the HS. product. How are you thinking about existing home inventory in those two markets specifically today and did higher inventory negatively impact the orders in the quarter?
Thank you.
Paul Romanowski
I think similar to what we've seen last quarter and through today, yes, inventory continues to increase not just in Florida but across the markets. But we still feel good about our competitive advantage, especially in the price points that we operate in and with the incentive package and opportunity with being able to be flexible in rates. And so, you know, I don't think that, you know, some of the flatness in sales that you saw across those regions was significantly impacted by increase in inventory, and we still feel good about the demand just not as vibrant as it was in prior quarters.
Joshua Chan
Thank you, guys.
Operator
Carl Reichardt from BTIG.
Carl Reichardt
Thanks morning everybody, once again for me, as I expressed to you all privately, I have my condolences on the dearest passing, I'm really very sorry for your loss and the industry's too. So about that said, John took one of my questions, but I wanted to ask about intra-quarter sales and closings, I think it was over 50% last quarter. I'm curious what it is this quarter and given that you're back to really normalized cycle times and you've got a good amount of inventory heading into Q4 and into next year.
What's your guess sort of long term is to sort of the sales closings, inter-quarter levels going to be on a go-forward basis.
Paul Romanowski
I think we've seen with the volatile interest rate environment as choppy choppy traffic patterns when rates move, the traffic patterns are impacted. And we saw that through the quarter. I think we ended the quarter with better traffic patterns, better demand and felt that coming into July. We would also see is that people are trying to have interest rate certainty when they're buying a home. And so homes that are closer to completion are more attractive because they can get into a better interest rate that we can help them with on our builder Forward program.
And at the same time, that means we're buying a little bit later. And so we're seeing a high level of homes sold and closed in the same quarter, we're focused on the storage space to drive a closings number and the sales are going to occur between those two things.
Carl Reichardt
Okay. And then one of the elements you guys have talked about in the past, I think it's still in your deck. Is this idea of getting your cash in and out of land deals in 24-months. And I'm kind of curious, as you're looking at deals going forward here, obviously, we've seen entitlements lot development times take longer and longer. Is that still realistic to expect that as you underwrite, you're going to see that.
And maybe what percentage of your current communities right now have hit that, that goal of getting your cash in and out within 24 months of those transactions?
Thanks.
Michael Murray
Yes Carl. Yes, that has been a standard of us on underwriting for several years and we intend to hold to that. We really aren't looking to own that land until it's shovel ready. So although the entitlement may take longer, we are positioning ourselves in expectation of that time so that we can have properties under contract by end or a third party development partners involved to help. And so the more lots that we have more homes that we're building on lots that were developed by a third party developer makes it easier for us to maintain that 24 month cashback. So we don't always hit it. We'd love to say we do, but reality sets in sometimes, but it's absolutely an underwriting standard that we intend to hold onto.
Carl Reichardt
Appreciate it, guys. Thanks.
Operator
Stephen Kim, Evercore ISI.
Stephen Kim
Thanks very much, guys. I'll let me also echo what Carl Carl sentiments. You know about D an are really a great man and it was a it was a real pleasure to work with them all these years.
I do want to ask about your cash flow commentary, which I found very encouraging, both in terms of the remaining quarter, you have this year. And then also your estimations about next year, I think you said you were looking to increase you expected or hoped to increase free cash flow next year. And obviously, deploy that maybe more towards repurchases and dividends.
So just leaning into that a little bit more. Your guidance has typically been around homebuilding operating cash flow, where rental and Forestar you don't have kind of been some offsets to that. And so your consolidated free cash flow obviously being a little lower than your or meaningfully lower than your homebuilding cash flow.
But you said, I think I heard you right that the rental inventory is going to remain consistent going forward. So does that mean that going forward, your homebuilding operating cash flow is going to be much, much closer to your consolidated. And when you talk about hoping to increase your free cash flow, are you talking homebuilding, are you talking or can we say now that's pretty much consolidated free cash flow increasing next year.
Paul Romanowski
Thanks, Steve. Thanks for asking this question. This helps us clarify this. Yes, we are talking about consolidated cash flow and going forward into fiscal '25, we would anticipate any future guidance that we provide on cash flow will be based on on a consolidated basis, with our rental inventory now flattening out stabilizing within a range around the current level, we would anticipate that our consolidated cash flow will be much nearer to the homebuilding cash flow level. There won't be as much of an offset from homebuilding cash flow from from rental.
Forestar is consolidated in our financials. We would expect them to continue to use cash flow. But just as a reminder, they're totally separately capitalized. So it really doesn't impact the cash flow we have available to utilize for shareholder returns. But with the sharp improvement in our cycle times this past year, our inventory turns have improved. We expect the improvement to continue into next year. So the efficiency in our homebuilding operation is improving and therefore, the cash flow generation from our income should continue to improve with stabilization and rental.
We do expect an increased level of consolidated cash flow next year, and then that's reflected in the increased share repurchase authorization that our Board authorized that will be utilizing going forward as we expect to see proportionately higher share repurchases and dividends being paid out of that cash flow.
Stephen Kim
Well, that all sounds pretty great. So thanks for that. That does also segue very nicely to my next question, which relates to your levels of spec inventory and backlog turns that we can expect . Your guidance for the fourth quarter closings implies a fairly high level of backlog turnover. And I'm wondering if you can give us a sense for what is a comfortable level of backlog turn that we can expect going forward is what we're seeing this year kind of what can we expect kind of a similar level on a going forward basis.
And tied to that, your spec inventory, I think you're running at like 26 total specs per community. Actually you don't report community -- let me put it this way. Whatever your spec levels are per community where they are today, is that about what we can expect on a go forward basis, both on a total basis and on a finished basis? Or if you can give us some color there on terms of what is a target range for finished specs and normal specs and backlog turnover ratio?
Jessica Hansen
Sure. That was a lot to unpack for you, but I'll do my best to answer all of your questions. So on the latter part, there really is no global expectation for number of specs. We run the business, as you know, community by community. And so our operators are adjusting based on their sales environment and in each individual community in terms of what they're starting and how many specs they're going to carry based on their sales run rate that they're experiencing. And so they can adjust very quickly to current market conditions in terms of either slowing down or speeding up, assuming we have the finished lot position to do so.
And so that kind of just roll that from a bottoms up perspective, we're very comfortable with where we are today is I think Paul's remarks on the call said we're selling homes still later in construction and to one of Mike's earlier points that we buyers want a certainty of close. And so the 60 to 90 days of being able to lock the rate, we're very comfortable with our completed spec position today, and it is allowing us to run at much higher backlog conversion rates than we have historically.
We don't really focus on backlog conversion. We focus on turning our houses and not running with an excess supply of completed specs that have been sitting for an extended period of time unsold. And so that's really our focus is on continuing to turn our houses faster. And as long as those completed specs aren't age for an extended period of time. We're very comfortable running with the levels we're at today.
Stephen Kim
Okay, that's helpful. Thanks very much, guys.
Operator
Mike Rehaut from JPMorgan.
Michael Rehaut
Great, thanks. Good morning, everyone. And I also wanted to express my condolences on the loss of D.R's, obviously a great leader and visionary for the industry, and he will be sorely missed.
I wanted to start off my first question, just on some of the comments you made around. I think earlier you said there was some choppiness during the quarter, obviously with rates earlier in the quarter being a little higher. At the same time, you talked about incentives maybe being a little less, then you expected and that drove the gross margin upside. I was just kind of curious as rates maybe subsided a little bit or came down, perhaps to the lower end of their range that we've seen in the last three, four, five months.
If any of that choppiness has subsided. And, you know, it appears that maybe incentives are similar as you see them going in from 4Q versus 3Q, but if it's had any impact on either incentives or just more broadly demand trends as those rates have come in a little bit in the last month or so.
Jessica Hansen
Obviously any pullback in rates we would call beneficial and we would expect to have some relief on the incentive front as incentives are able to be reduced or at least the cost of the incentive that we're offering and that we are still balancing that with just overall affordability issues in the market today. And we do continue to experience higher loss costs, which is why our guide for Q4 would be a relatively flat gross margin because even if we do have the ability to pull back on incentive costs to some extent. And we do have cost pressures, particularly on the loss side.
Michael Rehaut
Okay. No, that's that's that's helpful. Makes sense. And also maybe just along this line of questioning. On your prepared remarks, you highlighted that you reduced prices and sizes of homes to a degree over. And I don't know if that was specific to the quarter or just more broadly over the last several quarters, but would love to get a little more clarity around that.
Comment and you'll make maybe just more broadly, obviously we can see the closing ASP. and them your backlog ASP. But just kind of curious, obviously, there's mix that, that that impacts those numbers maybe just give us a sense of percent of homes that you've either lowered or reduced prices. And by how much. By contrast, if there's been some percent of homes or communities that we've raised, prices or sizes and how to think about the ASP for the business going forward into '25?
Paul Romanowski
Alot a lot there in that question. So in total, our average house sale house size is down about 2% and from a year ago and about flat sequentially. And you're right that is a mix reflection of what our operators are choosing to start in a given community and the communities that they're planning to come online. And we might be moving to a few more townhome communities to meet affordability targets for a given submarket, with regard to price increases or price decreases you have that's occurring very much week to week at a community level by our operators as they're gauging their market demand, their inventory conditions and their future log supply.
So we feel really good about those teams making the right decision and we really don't aggregate up and say we had working in the communities like a price increase, 20% of decrease, every else was flat. And we just don't look at those numbers that I mean at a high level here, we tend to look at are we turning our housing inventory and are we driving returns community by community? The best we can.
Michael Rehaut
Great. Thanks a lot.
Operator
Matthew Bouley from Barclays.
Matthew Bouley
Good morning, everyone. Thanks for taking the questions. I wanted to go back to the comments around finished spec. I think you were clear that that you're intentionally selling homes later in the construction cycle for a lot of obvious reasons. But obviously, the number of expected rise sequentially, your starts did come down sequentially. I'm trying to understand if there is any kind of signal we should take from that around sort of the state of demand, with finished spec being higher, is there an implication how we should think about margins going forward?
To the extent you have to clear some of that with either incentives or price?
Paul Romanowski
Yes, Matthew, I think that some of that what you've seen us increase in completed specs is we have seen a consistent improvement in our cycle times so those homes are moving through the construction at a faster pace, which means they're reaching completion sooner. So even though we may still be selling those homes later in the construction process. It now allows us to sell them in with a with a closer certainty. So we'll cycle through that. We don't worry a lot about, you know, how many of them exactly as a percentage are completed.
As Jessica pointed out earlier, it's more focused on are they sitting once they reach completion, so as they age and that tends to be an indicator that we've seen slower absorption or demand community-by-community. So we're focused on maintaining housing inventory levels that we need in each community, and we're going to moderate that and I will starts either increase or pull back based on demand, assuming we have lots in front of us that we need to continue the pace that they were looking for. We're very comfortable with the housing inventory that we have. We don't have a buildup of aged inventory and feel good about that going into the fourth quarter.
Matthew Bouley
Got it. Okay. That's very clear, Paul. Thanks for that. Secondly, I noticed you mentioned earlier in the quarter that stick and brick were down, costs were down sequentially on a per square foot basis. I'm curious as we think about that fourth quarter margin guide of but flat sequentially, I mean, is the expectation that stick and brick is continuing to come down further into the next quarter? And I guess what specifically in terms of construction costs, are you actually able to press down on that?
Michael Murray
I think we're looking for effectively plastic and break costs. We've gotten a lot of the tailwind out of the lumber price decreases coming through. And I think we're coming to a more consistent level there. The balance of our of our stick and brick costs, we're probably seeing some pressing for increases. Some that are we're able to make some progress with them in various markets. It starts and pulled back. People come looking for work and maybe a little bit sharper pencil coming in trying to get the next neighborhood and the next phase of starts.
And so we expect some plastic and break, we'll probably see an escalation in a lot of cost going forward in the fourth quarter. And then the ultimate margin is going to determine based upon what the concession levels are like in the fourth quarter. And since a significant portion of our closings in the fourth quarter will be sold in that quarter, north of 40%, and that will heavily drives the ultimate margin. So we felt very comfortable looking at a flat margin environment from Q3 to Q4.
Matthew Bouley
Thanks, everyone. Good luck.
Operator
Alan S. Ratner - Zelman & Associates LLC
Alan S. Ratner
Hey, guys. Good morning. And I also share my condolences to you and D.R's family on his passing in the quarter. And so thank you for all the great intro. So far, we've heard from some other builders and also just other consumer facing companies about some deterioration, I guess, in the credit quality of the consumer recently over the last handful of months have seen savings rates on the decline. You guys are done a fantastic job keeping your price point low when you walk through all the drivers of that.
But I'm just curious if you can provide some insight into what you are seeing from the consumer today in terms of their ability to qualify funds for down payments and your credit card debt et cetera, any color there would be great.
Jessica Hansen
[Credit Card] rate still being around 18%, we feel very comfortable about the buyers that are making the rand or sales offices and their ability to qualify a historical cancellation rate for us would be high 10s to low 20s. And so we're at the low end actually have a comfortable cancellation rate on what we closed this quarter, very strong cycle at [725], I think for the second quarter consistently. And the only noticeable difference in terms of the buyers that we're ultimately selling and closing to is that their average income has, of course, unfortunately, had to continue to rise because of the interest rate environment today. So on a household income basis, where we were at roughly I think it was the first quarter. It rounded up to $100,000 $99.9 and is the average household income on the buyers who utilize our mortgage company and closed in a home in the third quarter.
And so that's really the only noticeable difference is the buyers coming into our sales offices today do have to have higher income to be able to qualify. And but in terms of what we're selling and closing no noticeable deterioration in those credit metrics, everything has been very stable.
Alan S. Ratner
That's great to hear. Appreciate that, Jessica. And secondly, a really positive commentary on the cash flow and capital allocation. I think that that's going to certainly excite investors, if I look at your last several years, you've been buying back around 3% of your shares each year or at least reducing your share count by that amount. Some other builders have been a bit higher than that. It certainly sounds like you're looking to take that a bit higher. Is there a target you could give us just to think about where that can go on an annualized basis could be to be in the kind of mid to high single digit range. And I know you have the authorization in place, but doesn't really give us a lot of insight into kind of what timing you expect to utilize that?
Paul Romanowski
You know, yes, it does not have an expiration date of our last authorization was was issued in our first quarter, so that one lasted about nine months. Typically they've been in the 12 month range, but but we're not providing specific cash flow or repurchase guidance for '25 as of yet.
As we just commented, we want to go through our budgeting process before we provide that specific guidance. But we do expect that as cash flow does provide a significant increase next year, we will increase our repurchases and dividends proportionately to that.
So we do expect it to be a meaningful step up in the level of repurchases and the reduction in share count will be a function of really where our share prices as well in combination with that, because we're allocating dollars and ultimately we will we will be in the market. We'll repurchase shares that we're able to get with those dollars, but would expect the reduction in share count to be greater next year. Than it than it has been the last few years.
Alan S. Ratner
Understood, appreciate. Thanks a lot.
Operator
Eric Bosshard from Cleveland Research.
Eric Bosshard
Thanks. Two things. First of all, that to circle back to the choppiness on demand relative to the movement in rates, I'm just curious how much of the orders now are using a rate buy-down. And I guess I would have thought with the rate buydown prevalence there'd be less visibility and influence on consumers as a result of that. Can you just help me understand that a little bit better.
Jessica Hansen
Yes. And we actually saw a slight tick-up in the number of buyers getting the permanent rate buydown, which is the vast majority of what we're offering in the market today of the buyers that utilized our mortgage company. It was roughly 77%. I think that translates to about 60% of the overall business give or take. And that was up slightly from the second quarter and it was up more significantly from from a year ago.
Paul Romanowski
I think there's a lot of noise in the marketplace when rates are moving and rates are moving up. And that affects, I think, our prospective buyer behavior as to whether or not they're even going to come into the sales office and talk to us once they come into the sales office and they understand what's available to them, they might have had an expectation that I had to make a 7% mortgage rate work in my budget and they come in and we're able to put them in something different at a different monthly payment.
It opens our eyes up quite a bit to what's possible. And so they struggle becomes the traffic patterns. If we get we get the traffic, we're pretty good conversion. But sometimes all the headline noise around interest rates can depress the traffic?
Eric Bosshard
And then secondly, if Florida has been an important and successful market, it sounds like it continues to be both. I'm curious if you could just dig a little bit more into for us what's going on there in terms of traffic and price sensitivity and what you're doing or what your communities there are doing in response to that to position the business to continue to grow?
Bill Wheat
Yes, Florida has been an important market to us, and we certainly continue to see in-migration people. People love to live in Florida want to be there, but affordability is challenged like it is across the country. And so we've seen seen significant rise in prices in Florida and across the country. And with interest rates are sticking where they have. It's certainly taxing and that's Jessica spoke to the real change in and buyers is they just need to make a little more to afford homes at a static sales price in a higher interest rate environment.
And I think that that's really what we're saying on the impact of sales in Florida, not so much a significant change in traffic and or basic demand or want it's a matter of continuing to provide the right house at the right affordable price point that reaches as many people as possible and that's what we continue to strive to do as we position our new communities.
Eric Bosshard
Thank you.
Operator
Sam Reid from Wells Fargo.
Samuel Reid
Sam, your line is live and thanks so much. So I wanted to touch on your rental business. One of your bigger competitors is looking to do more in this space, but they're also approaching it from perhaps a less capital intensive standpoint. So first, maybe talk through the implications as more builders enter the rental space, are the build to rent space? I guess I should say, but second, are there opportunities to recapitalize this segment longer term, perhaps run it with more third party capital? It sounds like your rental inventories are rightsized for now, but just curious if there's room down the road to rethink the approach to capital structure here.
Paul Romanowski
As we continue to grow in this business, we're continually looking at ways to not only capitalize, but how we want to execute in this space. And I think from a single-family for rent basis, we've become more efficient with the capital and how we produce and we sell these communities. And I think that's some of what you're seeing in our moderation of growth in the inventory levels that we expect to see consistency of the investment level that we have out there. And so we still see a strong demand. We still see an undersupply and ability to meet the demand of what's out there. So we're going to maintain. We're going to continue to be focused on it ourselves and be as efficient as we can with that capital.
Samuel Reid
That's helpful. And then switching gears to community count that was up double digits still in Q3, if I'm not mistaken. And it's really been strong throughout 2024. And I believe in the past, you've indicated you expect that growth to slow. And I know you're not providing guidance obviously for 2025, but curious if there's a level of community account growth that you'll need to sustain next year in order to hit those market share gain aspirations?
Thanks.
Jessica Hansen
Sure, Sam. And the great thing is the position of strength we're coming from in terms of even if we grow sub-10%. We're generally growing the size of a top 10 builder and consolidating share regardless. But I think we have tried to get across the point the last couple of quarters that we do believe going forward, more of our growth is going to come from community count. And whereas really for most of this cycle outside of the early years, it's been coming from increased absorption. So we do recognize that to continue to grow. We're going to continue to need the increased communities.
Some of that come through our increased market count, which has expanded dramatically over the last several years, and we've still got a hit list of quite a few additional markets to enter into. And we're continuing to work on our finished lot position and to where we can get those new flags open open sooner.
I think what we said last quarter does still hold, though within the next quarter or two. I think our community count is going to moderate. It won't be up double digit. But I think we're hopeful we can continue to maintain it in at least a mid to maybe high single digit increase for some period of time. And then at some point, it may not have to grow at a mid to high. It may just be a low to mid is you already kind of indicated that was one of the hardest things for us to talk about and get right, because there's so many moving pieces to either bringing on a new community or closing out one in terms of sales pace. And so we don't ever give specific guidance and that that's our best estimate as we sit here today.
Samuel Reid
Thanks so much. I'll pass it on.
Operator
Anthony Pettinari from Citi.
Anthony Pettinari
Hi, good morning. Can you talk about what lot costs were in the quarter, maybe mix-adjusted? And then based on the prices for land that you've been buying and expectations for stronger cash in '25 should should we expect a lot cost inflation to maybe kind of normalize a bit in fiscal '25? Could it kind of go back down to low single digit or mid single digit? Or just any thoughts on those the lot cost trends?
Paul Romanowski
Yes, we have continued to see increase in our log cost and slight increases as a percentage of overall revenue. We don't expect to see that moderate significantly. You know, I don't know whether that settles in at the high singles, low double digits, but we do expect that to be a headwind for us as the reality of the cost to put a lot on the ground. We just haven't seen much relief in that. And so we expect to see a continued climb.
Jessica Hansen
In terms of the specifics since you asked for that on a per square foot basis, as I said on the call, sequentially, we were up about 2.5% on a lot cost basis, year over year, we were still up a low double digit percentage, which would still have some mix impact that we've continued to talk to in terms of the South Central and Southeast, making up a slightly lower percentage of our closings.
And those are generally lower lot cost markets. And to kind of give you another data point we typically talk about in terms of the just the percentage of home sales revenue that our lot cost averages. And it generally is in that 20% to 25% range pretty consistently. And we're right in the heart of that range today, even with the increased lot costs we've been experiencing.
Anthony Pettinari
Got it. Got it. That's very helpful. And then just I guess Forestar is obviously a major source of developed lots for you. But putting aside Forestar, can you just touch on the kind of the health of your land banking pipeline and partners?
Paul Romanowski
Yes, I wouldn't necessarily refer to it as a land banking pipeline. I'd refer to as a lot developers pipeline. It's a very large collection of some very seasoned experienced land development companies across the country that have had to, frankly, they've had to look for some different capital sources and we've been able to help them find some other capital sources as a lot of regional and community banks have pulled back from that sort of blending, but there's been other capital sources willing to step up when the developers working for somebody like D.R. Horton said, we've been able to keep those folks in business producing lots for us. And 64% of our closings this quarter came on lots developed by someone else besides D.R. Horton. And that's great three part of our business strategy.
Anthony Pettinari
Okay. That's very helpful. I'll turn it over.
Operator
Buck Horne from Raymond James.
Buck Horne
Thank you. Good morning. My question is just a quick one on Forestar and just if there's an update on the longer-term plan for what to do with Forestar or, you know, is there I thought to eventually recapitalize that so Forestar could eventually be deconsolidated?
Michael Murray
Yes. Forestar is a very important part of our strategy with them being separately capitalized, they are able to support their growth with their own capital sources. And so it does not have any offset on the cash available for the parent company and our shareholders and they're growing their platform. And so we are working alongside them as they grow. Their platforms are now in about 60 markets, I believe. So roughly half of the markets that to the D.R. Horton has. And so they've still got a lot of opportunities to grow that platform.
And so our focus right now is to continue to work with them as they grow, improve their operations, get to get as efficient as they can at delivering lots to us and to the industry. And and then as they mature, they're raising capital. I would expect them to continue to raise capital over time. And so as that capital structure ultimately matures, then that will give us the visibility to be able to make the determinations on what we do in terms of our investment.
And so obviously, we know we made an additional investment to buy a majority stake, and we have not you contributed or needed to contribute any additional capital to Forestar. And I don't expect that we will need to going forward, but there will be an opportunity at some point down the line to look at their capitalization when they're at a much or more mature level.
Buck Horne
Got it. That's helpful. I appreciate. And quickly on the rental operations in terms of your current inventory balance, it kind of looks like it's about one-third single-family rental, but two-thirds multifamily. Is that the right mix for how you think the inventory is going to track going forward? Or do you think at some point given the amount of multifamily inventory that's out there right now?
Do you think it shifts more towards the SFR waiting.
Michael Murray
I think near term, our expectation based on the pipeline that we have of deals is the weighting towards multifamily is probably a little bit higher in the near term. The next few quarters over the long term, I would expect that to balance out a little bit more than where it is today as FSR. picks back up. But near term probably a little bit heavier multifamily.
Buck Horne
Okay. Is it like 50 50, the right optimal balance kind of where you'd like to get it to?
Michael Murray
We don't have a set level unnecessarily it's whatever the market demand is and whatever the we believe best mixes for returns community-by-community across our markets.
Buck Horne
Thank you.
Operator
Susan Maklari from Goldman Sachs.
Susan Maklari
Good morning, everyone. You mentioned that the cycle times have actually moved below your normalized levels historically. Can you talk about where you saw that improvement come from? And what do you think that is, especially if we do see a world where perhaps rates come down and activity picks up on a relative basis?
David Auld
Yes, we've seen that mostly from We don't really have supply chain challenges that has largely healed, and we have the parts and pieces we need to build and labor has strengthened. We've seen with our consistent production and market scale. We have the labor that we need and job site maintenance and controls and efficiency, just all of that kind of coming together. And that's where you've seen our cycle times drop a little bit below our historical norms. We continue to focus on being more efficient with the construction process and something we're focused on every day.
Susan Maklari
Okay, that's helpful. And turning to the M&A environment, can you talk a bit about what you're seeing there? Has anything changed and how that pipeline is looking today?
Michael Murray
We still prefer small tuck-in acquisitions. We like things that will either expand our footprint in a new and emerging geography where we can acquire some people along with be up a lot position in other places, it becomes oftentimes a homes in construction finished one. And then we're able to work with the selling principle to stay in the business as a lot entitling and developer. And that's been a very successful strategy for us in creating what development partners around the country as well, still see good flow of deals to look at. But I would say we're pretty selective on what we're willing to do right now.
Susan Maklari
Okay. Thank you for the color and good luck with everything.
Operator
Ralph Jadrosich from Bank of America.
Rafe Jadrosich
Hi, good morning. Thanks for taking my questions. And I'll add my condolences on D.R's. I'm just going back to your earlier comments on price and pace and then targeting market share gains for 2025. If I look at your starts in the quarter, they're down on their tracking down year over year. The census single-family starts are up 7% quarter-over-quarter in the second quarter. Your margin was it was higher though, on has there been a strategy shift at all like on and why not incentivize or push orders more at this at this gross margin level?
And then my second question would be how do we think about the starts pace going forward relative to your plan for market share?
David Auld
Yes. No, no change in strategy, right? We are seeing efficiencies in our operation, which is why you've seen a little lower starts pace than maybe might have been expected. But as we continue to move through this market, we're going to have to see some improvement in the overall increase.
I guess if you will in the overall Star space to keep pace with with our growth goals. But it's really just us managing our inventory, making sure we have that we need community by community to hit the price and pace goals that we're looking for, and we'll manage that inventory based on our ability to to get those homes moved through the construction process and based on availability of lot community by community in front of us.
Thank you. And then just on the Q4 gross margin guidance of flat quarter over quarter, it sounds like you're expecting that net price to be flattish with incentives. You talked about sticking brick being flattish and land is up. What is it on? Is there another piece in here that that's going to be giving you relief on the cost side, like what's happening with broker commission, I'm to get to that flat quarter over quarter.
Michael Murray
Yes, as we look is we're going into the quarter here. Obviously, we've had some rate volatility. We did. We did see sequential ASP growth. And so there's upfront a little bit of price. We saw a little bit of our cost of our incentives go down sequentially this quarter. So it's probably a little bit of an assumption, a little bit of price, a little bit of incentive cost reduction in the quarter to offset the log cost increase.
Rafe Jadrosich
Great. Thank you.
Operator
Mike Dahl from RBC Capital Markets.
Michael Dahl
And just to follow up on Rafes question about kind of the price versus pace. I'm sorry to hit it again, but I guess from a more near term standpoint was the decision to not lean in more heavily on incentives because at the time there was rate volatility, you didn't your perception was that there just wouldn't be a sufficient demand response or anything else you can give as far as just during the quarter, it did see sounds like you kind of made a decision not to not to push more aggressively.
Michael Murray
You know, we aren't. We aren't making that decision here on a broad scale. I wish we were good enough to know which way rates were going to go, but we rely on our operators at a community level to make those decisions based on the traffic volume that they have in the sales demand and the people that and buyers that they have in front of them on a daily basis. And I think overall what that resulted in is a solid margin for us and sales that to that seasonally didn't increase maybe like they would. But we're in a good place with the sales pace that we achieved in the quarter and the inventory we have to hit our guidance for the year.
Michael Dahl
Okay. And then on the rental business, just specifically on the fourth quarter, obviously the last three quarters, it's been a volatile environment to sell either SFR and multi-family. Can you talk more specifically about what your expectations are for Q4 for the rental platform ?
Michael Murray
The rental is baked into our consolidated revenue guide and there is uncertainty around timing of closings over of rental deals. So there's a little bit of a lumpiness in those numbers, but that's built into the range that we're providing in our revenue guide that no other specific guidance on the Q4 revenues from rental.
Michael Dahl
Okay. Thank you.
Operator
This does conclude our Q&A session today. I would like to hand the call back to Paul Roman, Askey for closing remark.
Paul Romanowski
Thank you, Paul. We appreciate everyone's time on the call today and look forward to speaking with you again to share our fourth quarter results in October. Congratulations to the entire D.R. Horton family on producing a solid third quarter. We are honored to represent you on this call and greatly appreciate all that you do.
Operator
Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.