What Meritage Homes (MTH) Said on Its Q3 Earnings Call

Key Points

• Demand weakened significantly: Meritage Homes’ Q3 sales orders fell 15% year over year as mortgage rates rose to 7.5%, affordability pressures increased and buyers became more cautious. The company is adjusting home starts and inventory rather than pursuing volume through heavier incentives.
• Financial performance deteriorated: Home-closing revenue declined 17% to $1.2 billion, net earnings dropped 32% to $68 million and adjusted gross margin fell to 17.9% from 20.1%. Higher incentives, lot costs, tariffs and transportation expenses are expected to continue pressuring margins.
• Management is prioritizing flexibility: Meritage reduced land spending, ended the quarter with $677 million in cash and no credit-facility borrowings, and returned $86 million to shareholders. It is reallocating capital toward first-move-up housing while withholding fourth-quarter and 2027 guidance because of limited market visibility.

Meritage Homes NYSE: MTH reported lower third-quarter sales, revenue and earnings as higher mortgage rates, affordability pressures and consumer uncertainty weighed on homebuyer demand. Management said it is responding by reducing discretionary spending, moderating land investment, managing home starts and inventory, and prioritizing liquidity.

The homebuilder generated 3,083 sales orders in the third quarter of 2026, down 15% from a year earlier despite a higher community count. The decline primarily reflected a 21% drop in average absorption pace, partly offset by a 7% increase in average community count. Net sales averaged 3.0 per month, while the cancellation rate was 13%, unchanged from the second quarter.

Executive Chairman Steve Hilton said rising mortgage rates, inflation and concerns about job security have made buyers more hesitant to commit to purchases. Mortgage rates increased from about 6.6% at the start of the quarter to 7.5% at Sept. 30, according to CEO Phillippe Lord.

Financial Results and Margins

Third-quarter home closing revenue totaled $1.2 billion, down 17% year over year. Closing volume fell 14%, while the average selling price on closings declined 4% to $365,000, primarily because of higher incentive costs and utilization as well as geographic mix.

Net earnings decreased 32% to $68 million from $99 million in the prior-year period. Diluted earnings per share fell 25% to $1.04 from $1.39, while adjusted diluted EPS was $1.11 excluding real estate inventory impairments.

Home closing gross margin was 17.4%, compared with 19.1% a year earlier. Excluding inventory impairments and terminated land-deal charges, adjusted home closing gross margin was 17.9%, compared with 20.1% in the third quarter of 2025.

CFO Hilla Sferruzza said margins were affected by higher lot and incentive costs, as well as lower revenue leverage. Lower direct construction costs and reduced performance-based compensation partly offset those pressures. Direct cost per square foot declined nearly 5% year over year, extending Meritage’s cost savings to approximately 14 consecutive quarters.

However, Sferruzza said tariffs, higher oil-based materials costs and transportation expenses are creating more supply-chain pressure. If those trends continue, modest cost increases could affect margins in coming quarters. The company also expects higher land development costs incurred from 2022 through 2025 to continue weighing on margins through at least 2027.

Inventory, Starts and Market Conditions

Meritage closed 3,187 homes in the quarter and started about 3,400 homes as it sought to align construction activity with sales pace. More than 55% of third-quarter closings were sold during the quarter, producing a backlog conversion rate of nearly 190%, within the company’s 175% to 200% target range.

Ending backlog totaled approximately 1,600 homes, down from about 1,700 a year earlier. Total specs and backlog combined were about 7,100 units at quarter-end, 12% below the prior-year level. Spec inventory fell 14% year over year to approximately 5,500 homes, although it rose 7% sequentially from the second quarter.

Completed specs declined to approximately 1,900 units from about 3,000 a year ago. Completed homes represented 34% of total specs, near the company’s target of one-third. Lord said Meritage entered the fourth quarter with slightly more spec inventory per store than anticipated after market conditions weakened faster than expected in September, and the company is adjusting starts accordingly.

Management said it intends to operate between three and four net sales per month over an extended period, with four representing the more efficient level but three still allowing for efficient operations. Lord said the company will not pursue volume at the expense of margins when demand is relatively unresponsive to additional incentives.

Regional results varied. Dallas and Houston were among the company’s strongest markets, while San Antonio and Austin were more difficult. South Florida and Jacksonville also performed well, while California, Denver and Arizona remained highly competitive markets requiring greater incentives to move inventory.

Land Strategy and Capital Allocation

Meritage opened 34 communities during the quarter, primarily in the East region, and maintained its expectation for 5% to 10% community-count growth for full-year 2026. The company had 348 active communities as of Sept. 30, up 4% from a year earlier.

Management is also reallocating capital toward first move-up, or “1MU,” housing, with the goal of making the segment about one-third of the overall portfolio. Lord said the strategy is intended to provide a more balanced product mix and improve diversification as customers mature and demand more highly appointed homes. The company expects the higher mix of first move-up sales, orders and closings to begin affecting results in the second half of 2028 and into 2029.

Land acquisition and development spending fell 38% year over year to $329 million in the quarter. The company now expects full-year land spending below $1.5 billion. Meritage controlled or owned about 71,800 lots at quarter-end, equal to a 5.3-year supply based on trailing 12-month closings, slightly above its four- to five-year target range.

Sferruzza said the company will review its land portfolio during the balance of 2026 to determine whether individual deals remain appropriate for its expected growth trajectory and current market conditions. Management did not provide fourth-quarter or preliminary 2027 guidance, citing limited visibility and rapidly changing market conditions.

Liquidity and Shareholder Returns

Meritage ended the quarter with $677 million in cash, no borrowings under its credit facility and a net debt-to-capital ratio of 18.9%. The company said it is operating below its mid-20% net debt-to-capital target to preserve flexibility.

The company returned $86 million to shareholders through dividends and share repurchases during the quarter. It repurchased nearly 760,000 shares for $55 million and paid $31 million in dividends. Meritage increased its quarterly dividend 12% year over year to $0.48 per share.

Management said its near-term priorities are maintaining investment-grade credit metrics, funding the dividend and preserving ample liquidity. Lord said the company’s spec-focused operating model and 60-day closing commitment should allow it to respond quickly if mortgage rates, consumer confidence or other market conditions improve and demand rebounds.

About Meritage Homes (NYSE:MTH)

Meritage Homes Corporation is a residential construction company that designs and builds single-family homes in the United States. The company primarily serves entry-level and first-time homebuyers, offering homes in a range of floor plans and communities designed around affordability, energy efficiency and modern features.

Meritage Homes sells homes through its own communities and provides related services, including land acquisition and development, home design, construction, sales and customer support.

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