Century Communities, Inc. (NYSE:CCS) Q2 2022 Earnings Conference Call July 27, 2022 5:00 PM ET
Company Participants
Tyler Langton – Senior Vice President, Investor Relations
Dale Francescon – Chairman and Co-Chief Executive Officer
Robert Francescon – Co-Chief Executive Officer and President
David Messenger – Chief Financial Officer
Conference Call Participants
Deepa Raghavan – Wells Fargo
Alan Ratner – Zelman & Associates
Alex Rygiel – B. Riley
Jay McCanless – Wedbush
Alex Barron – Housing Research Center
Operator
Greetings. Welcome to Century Communities Second Quarter 2022 Earnings Conference Call., All lines will be on listen-only mode throughout the presentation. We will have a question-and-answer session at the end of the presentation. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to Tyler Langton, Senior Vice President. Thank you, sir. You may begin.
Tyler Langton
Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the second quarter 2022.
Before the call begins, I would like to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company’s 2021 Annual Report on Form 10-K as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at www.centurycommunities.com.
The company undertakes no duty to update any forward-looking statements that are made during this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company’s presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Management will be available after the call, should you have any questions that did not get answered.
Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer and President; and David Messenger, Chief Financial Officer. Following today’s prepared remarks, we will open the line up for questions.
With that, I will turn the call over to Dale.
Dale Francescon
Thank you, Tyler and good afternoon, everyone. We’re very pleased with our record setting performance this quarter, including $214 million in pre-tax income, the highest in our history. Net income of $159 million, a second quarter record, and diluted earnings per share of $4.78, equaling the company record we established in the fourth quarter of 2021. The achieved levels of pre-tax income, net income and earnings per share represented increases of 40%, 35% and 38%, respectively from the prior year quarter.
Our focus on operational fundamentals enabled us to produce another quarter of strong gross margins of 28.2% and adjusted gross margins of 29.4%, which were only 10 basis points below the highest in our history. Second quarter EBITDA increased 33% year-over-year to a second quarter record of $230 million.
During the quarter we delivered 2,713 homes for $1.1 billion in revenues at an average sales price of $418,000 with deliveries generally flat year-over-year, while our average sales price was up 15%. Total revenues were $1.2 billion, a second record.
Backlog at quarter-end consisted of 4,767 sold homes valued at $2 billion, year-over-year increases of 7% and 12%, respectively. Net new contracts declined to 2,233 homes as the sharp increase in mortgage rates and overall uncertainty caused some homebuyers to pause their plans to acquire home as the quarter progressed.
We have seen this understandable and predictable pattern many times before, with the most recent being in the latter part of 2018. Given the strong underlying demographics that still exist, we expect buyers will return to the market as they adjust to these changes and continue to make decisions around their careers, marriage, and children that so often lead to the purchase of a new home.
The summer season for home buying is typically the slowest period of the year, and we expect that to be especially true this year. We are also seeing potential home buyers looking for homes that are closer to completion in order to lock-in their financing options. We do not have a significant number of available homes with near-term completions and coupled with the summer months, we expect our third quarter sales to be consistent with the second quarter.
While we still have the ability to raise prices in certain communities, most of our subdivisions have begun utilizing incentives more than they have over the past two years. Year-to-date, our incentives have averaged 80 basis points of average sales price versus 380 basis points in 2018, and we expect incentives to return to those levels.
The type and amount of incentive differs by community and by market. We have seen mortgage rate buy downs, forward rate commitments and rate locks to be effective in getting buyers in the door and signing contracts. We are not typically reducing base prices in existing communities, but are carefully reviewing them prior to opening a new community.
While inventory levels have started to increase for the industry as a whole, these increases are off very low levels and absolute inventory is still quite low. Months of supply for both new and resale homes in most of our markets remain well below the national average of 2.6 and rental rates are continuing to increase, which we believe will be positive for home purchases.
We are also encouraged to see that on a year-over-year basis, community counts in most of our markets were down significantly, including Atlanta down 11%, Charlotte down 13% and Houston down 10% according to John Burns Real Estate Consulting, further limiting supply and providing pricing stability.
We are well-positioned to navigate the current headwinds, given our focus on delivering affordable homes and the flexibility inherent in our model. By offering homes at the lower end of the pricing spectrum, we can appeal to the largest number of potential homebuyers and to the homebuyers that are buying more out of need as compared to a move up buyer, making a discretionary purchase. Our spec based model allows us to increase or reduce starts and react quickly to changes in market conditions. The exception of new communities, we are generally matching our starts pace with the sales cadence in a subdivision.
In the second quarter, we continued our goal of returning profits to our shareholders by maintaining our quarterly cash dividend of $0.20 per share and repurchasing approximately 791,000 shares of our common stock at an average price of $45.42 per share. The share repurchases were at a cost equal to 75% of ending book value as of June 30th, 2022.
Our record second quarter results are due to the innovation, commitment and resilience of our talented teams across the country. They continue to support our mission of providing our customers a home for every dream, and we thank them for their contributions.
I’ll now turn the call over to Rob to discuss our operating results and plans going forward in more detail.
Robert Francescon
Thank you, Dale and good afternoon, everyone. As Dale mentioned, our team performed well this quarter, and we believe the flexibility of Century’s operating model and focused on delivering affordably priced homes positively positions the company moving forward. We also benefit from the strategic operational initiatives that have been implemented over the last several years. And our business model is well suited to address the headwinds from the current interest rate environment.
Our homebuyers continue to have a healthy financial profile. Century Communities and Century Completes homebuyers had respective average FICO scores of 740 and 715 based on loans originated in the second quarter. Additionally, 75% of our deliveries in the quarter were priced below FHA limits, demonstrating our strong positioning within the affordable new home category and allowing us to target the widest range of potential buyers in any given market.
We did see the expected increase in our cancellation rates to 19% in the second quarter, which is still below the 26% cancellation rates we experienced in 2018 and 2019. The cancellations we experienced were primarily financing related. We continue to qualify buyers at a rate that is 50 basis points above the current interest rate.
On an ongoing basis, we evaluate and stress test all buyers in our backlog without a rate lock at interest rates up to 6%. And we are encouraged that only a small percentage of buyers needed to be canceled since they would no longer qualify at these higher rates.
At the end of the quarter, we had only 44 completed and unsold homes over our 45-plus markets. We will continue to carefully monitor changes in market conditions going forward and will generally match our starts with our sales so that we are in a position to sell and deliver homes to buyers as they come back into the market without taking undue risk.
The home building industry continues to be challenged by municipal and utility delays, supply chain issues and trade shortages. However, during the second quarter we saw our construction cycle times improve as various materials and labor are becoming more readily available. We are beginning to experience some easing of input costs, especially lumber and wood products, and expect further improvements in both cycle times and input costs in the back half of the year.
Century’s total community count at quarter-end stood at 213, and we have the ability to increase this number throughout the back half of this year, reaching as many as 240 to 250 communities by year-end. However, we intend to be mindful of local market conditions and retain the optionality of postponing initial vertical construction starts in new communities if warranted.
We ended the quarter with approximately 76,000 lots with roughly 47% owned and 53% controlled and a total lot pipeline down from the first quarter 2022 level of just over 85,000 lots. Since we have a disciplined approach towards land spend, we stepped away from a number of deals that no longer met our stringent investment standards. Reducing our acquisition commitments by over $500 million and our total potential land spend commitments by significantly more.
While our write-off of feasibility costs and deposits exceeded $2 million in the quarter, our focus on controlling lots versus owning lots gives us the ability to exit transactions at acceptable costs when the market adjusts. Our large footprint and presence in over 45 markets affords us the ability to look at a wide range of land deals and be extremely selective about where we invest our capital. Going forward, we expect to continue to adjust our land spend based on market conditions.
We are pleased with our performance this quarter and remain confident. We are well-positioned to continue generating exceptional financial and operating results into the future.
I’ll now turn the call over to Dave to discuss our financial results in more detail.
David Messenger
Thank you, Rob. During the second quarter of 2022, net income increased 35% to a second quarter record $158.7 million or $4.78 per diluted share compared to $117.9 million or $3.47 per diluted share in the prior year quarter. Pre-tax income was $213.6 million, a year-over-year increase of 40% and a company record. Home sales revenues for the second quarter grew to $1.1 billion, a 13% increase compared to year ago levels. This improvement in revenues was driven by a 15% year-over-year increase in our average sales price to $418,000 and the delivery of 2,713 homes in the quarter.
In the second quarter, net new contracts across our regions were 2,233. As Dale previously mentioned, this decline was primarily due to the impact that the sharp increase in interest rates had on potential homebuyers, particularly in the latter part of the quarter. Versus the prior year, we increased our quarter-end backlog 7% to 4,767 homes valued at $2 billion, a 12% increase.
In the second quarter, adjusted home building gross margin percent was 29.4% compared to 25.7% in the prior year quarter. Home building gross margin percentage improved to 28.2% compared to 23.9% for the same period last year. Both gross margin and adjusted gross margin were only off 10 basis points from the company records that were established in the first quarter of this year.
SG&A as a percent of home sales revenue improved to 9.6% in the second quarter compared to 9.9% in the prior year and 10.3% in the first quarter of the year. Pre-tax income margin was 18.3% compared to 14.6% in the prior year quarter.
During the second quarter financial services generated $22.8 million in revenues compared to $29.9 million in the prior year quarter. The business captured 70% of the closings and contributed $8.6 million in pre-tax income compared to $11.7 million in the prior year quarter. The decrease in pre-tax income compared to the prior year period was primarily due to fewer loan originations compared to the prior year and selling loans into the secondary markets at normalized margins this year versus 2021. In the second quarter, our tax rate was 25.7% compared to 22.5% last year, due to the federal energy tax credits not being renewed for 2022.
During the quarter, we invested $35.9 million in repurchasing 790,558 shares of common stock, leaving approximately 2 million shares available for repurchase under our current authorization. As a reminder, in the first quarter of this year, we invested $62.4 million in repurchasing 1,013,387 shares of our common stock. Combined, these share repurchases year-to-date have reduced our share count by over 5%.
We maintained our quarterly cash dividend of $0.20 per share this quarter after having increased it by 33% in the first quarter of this year. Our home building debt to capital ratio was 37.1% at quarter-end compared to 37.7% in the prior year. Our net home building debt to net capital ratio was 33.6% compared to a year ago levels of 23%. This increase in net home building debt was largely driven by investments in our WIP inventories during the quarter. The increase in WIP inventories is integral to monetizing the land we have on our balance sheet and opening our new communities. Opening new communities will be dependent on market conditions, and should we achieve our guidance range of 240 to 250 selling communities open at year-end, we will maintain this level of leverage through the balance of the year.
We ended the quarter with a strong financial position, including $2 billion in stockholders equity, a 31% year-over-year increase and $820 million in total liquidity. Our return on equity also remained near the top of the industry at 33.7%, which equaled the record level from the first quarter of this year and up from 27.6% in the year ago quarter.
Given the industry-wide slowdown in current activity, we are reducing our full year home delivery guidance to 10,750 to 11,750 homes. We are reaffirming our full year home sales revenues to be in the range of $4.3 billion to $4.9 billion. And depending on market conditions, we expect our year-end selling communities to be in the range of 240 to 250. We ended the quarter with a strong balance sheet and ample liquidity, which positions us well to continue to invest in the business and return cash to shareholders throughout cycles in the market.
With that, I’ll open the line for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
Our first question is from Deepa Raghavan with Wells Fargo. Please proceed.
Deepa Raghavan
Hi. Good evening, everyone. Thanks for taking the question. The order fall was pretty steep. Could you talk through how the quarter played out, especially absorption phase for June? And any color on what it is for July thus far? You mentioned sales would be — we should think about sales in Q3 to be similar to Q2. Just the clarification, is that orders or was that closings?
Dale Francescon
Sure. Deepa, this is Dale. I answer your last question. We were talking about sales. When we look at the sales in Q2 of this year and as compared to last year, part of it, it was a very difficult comp. We had a very high sales in Q2 of 2021. But going back to the specific quarter, as the quarter went on, we saw more and more pressure in terms of the — on the sales side.
We saw buyers pausing their home search as they needed to do — to digest the impact of the higher interest rates. In many cases, it’s not that they can’t afford the home with the higher interest rates, but it’s something that they need to adjust to the new norm. And we believe that the entry level buyer has a larger need to buy a home than a move up buyer who may just want a larger home. And so, we think that they will come back to the market sooner.
But in terms of July, we’ve seen pretty much the same thing we saw in the tail end of June. And that is that one, it’s summer and two, the buyers are still in that stage where they need to adjust to what the new interest rates are.
Deepa Raghavan
Okay. Would — I’ll just switch and ask on gross margins. It’s been pretty strong. I mean, pricing has been much stronger and most of us expected. That’s good news. But can you talk through other items that could have benefited gross margins or detracted gross margins in the quarter, for example, was lumber a benefit and also how much of was incentive a headwind, et cetera. Can you help us parse out the components of gross margins that actually helped or detracted within the quarter?
David Messenger
Yeah. Hey, Deepa, this is Dave. Gross margin during the quarter was obviously benefited from some strong ASP that we had as those homes were sold at an earlier period of time. When we’re looking at direct costs for the second quarter, lumber was a benefit, but we had — majority of the rest of the costs and that go into a home were increasing. And so, we still experienced a net increase in the second quarter on a sequential basis compared to the first quarter. So that was kind of a headwind.
And then on the incentive side, we’ve been running about 80 basis points in the first two quarters and year-to-date of 2022. Historically that number in the upper 300s — in the 380 basis point range. And as Dale said in the prepared remarks, we would expect that at some point here, those incentives get back that, so that’ll be a headwind for us moving forward.
Deepa Raghavan
Okay. One more for me, if I can squeeze in. Are you able to provide your thoughts on how pricing may play out from here? You cater to the entry level first time home, both are — you’re probably better situated to talk about the weakness in that segment, but we don’t see it right now in near pricing trends. But what are some of the — what would some of your thoughts be on how this might play from here? Should we expect a slow moderation in pricing or would — should pricing end up falling much a little quicker and sharper from here? Any thoughts there.
Dale Francescon
Well, generally as I said, my prepared remarks, we’re not dropping base prices in communities. And as we open new communities, we’re obviously carefully looking at what the base prices should be based on the competition and the market. Most of our incentives as opposed to price reductions are based around helping with regard to either closing costs or rate buy downs, that type of thing. So, when we look at it, while we certainly don’t have the ability across the board to raise the prices the way we and our peers have been doing it over the recent past, we’re not seeing that we would expect that they’re going to be a significant drop either.
Deepa Raghavan
Got it. Okay. I’ll pass it on. Good luck.
Dale Francescon
Thank you.
Robert Francescon
Thanks Deepa.
Operator
Our next question is from Mike Rehaut JP Morgan. Please proceed.
Unidentified Analyst
Hi, this is Andrew Rossi [ph]. I’m on for Mike Rehaut. Congrats on the quarter. I just wanted to ask, is there — can you provide any color on the timing of that historical? I know you mentioned that historically it’s around 300 bps for incentives. Is there kind of a timeline for the ramp to get there?
David Messenger
Yeah. What I was referencing was through — was our experience back in 2018, when it was a similar time period where you had rates that spiked up and that’s where the incentives ended up. But we don’t have any guidance out there in terms of when we’re going to get from 80 basis points today to some other elevated level. We’re just — we’re in the market right now. We are seeing incentives back in our communities and we’re just piecing it out. We’re not racing to the bottom. We’re trying to utilize various incentives and various levers in order to find the right mixture at each community in each buyer that gets people across the goal line.
Dale Francescon
And part of it is we’re seeing that there’s a real interest in the nearer term deliveries. And as a result where we — we have incentives, there’ll be more incentives on those homes where already there’s more interest in them. As a result, we shouldn’t have to provide as many incentives.
Unidentified Analyst
Thank you. That was super helpful. I’m going to pass it on.
Dale Francescon
Thanks.
Operator
Our next question is from Alan Ratner with Zelman & Associates. Please proceed.
Alan Ratner
Hey, guys. Good afternoon. Thanks for taking the questions here. First one, maybe just sticking on the incentive topic. Dave, I think you mentioned it’s an 80 basis points year-to-date. I’m just curious if you have any quantification specifically on what that is more recently in June and July. And I’m assuming those have been maybe disproportionately weighted towards Century Complete, correct me if I’m wrong, but it looks like that segment might have faced some outsized pressure on the orders and maybe cancellations this quarter? So, just curious if you provide a little bit more color about what you’re seeing specifically at Century Complete.
David Messenger
Yeah. The 80 basis points, there is a bit of a weighting more towards a Century Complete product than the Communities product. And obviously, as the quarter progressed, incentives would’ve been ticking up if we were trying to get somebody that was in backlog trying to get them across the goal line.
Alan Ratner
Okay. Great. Second, I guess on the lot option abandonments, first, I just want to make sure these are apples-to-apples. And it looks like your lot count dropped by about 10,000 lots sequentially. And I think you mentioned the write-off was just only over $2 million, which seems like a pretty small deposit for that number of lots. So, first off, is that correct? And second off, I’m assuming if, so that those were lots that were probably pretty early on in the due diligence process. So, how are you thinking more specifically about lot options that are closer to takedown, which I would imagine have larger deposits associated with them larger pre-act [ph] costs associated with them? Are you renegotiating? Are you trying to push out those takedown schedules? And are you contemplating walking away from some of those deals as well?
Dale Francescon
Well, first off, Alan, the mix was a variety of stages on the land summit inception, where we had just put under contract and others that were farther down the line. So, it was really a mix on that. But yes, to answer your last part of the question, we are looking at on the control basis, doing extensions on the land, if needed, looking at them from all angles to make sure that they meet our investment criteria going forward. And we take — for $2 million, yeah, that is a modest amount for the amount of lots that we did drop, but we’ve looked at the pool of controlled lots, that’s our business model to try to have more controlled than owned. And that gives us that type of optionality to try to control lots at a very small dollar amount. And that’s something we strive for — on all of our contracts to control them with less deposit dollars.
Alan Ratner
Great. Thanks for that added color. If I could add a quick one in here before I hop off. Your spec count, I think you gave finished specs. Do you have the total spec count, including homes under construction, and any color on kind of where in the construction process, the majority of those homes are?
David Messenger
Yeah. We haven’t disclosed the total number of homes we have under construction across the country, other than the fact that — obviously, we only have the 44 that were completed at the end of the quarter. So, we really haven’t seen any material growth in our completed spec count. And then, as we look at — having opened up new communities in the first and second quarter and started a number of homes in those communities, we just don’t have that many homes finishing here in the third quarter that are going to be made available for sale that are really going to cater to what the buyers are looking for today in terms of near-term completions.
Alan Ratner
Got it. Thanks for that color Dave. Appreciate it guys.
Dale Francescon
Thanks.
David Messenger
Thank you.
Operator
Our next question is from Alex Rygiel with B. Riley. Please proceed.
Alex Rygiel
Yeah. Thank you very much, and a very nice quarter, gentleman. Congratulations. Have you made any decisions yet that would impact your community openings in 2023?
Dale Francescon
So, we’re looking at that very carefully. And that’s kind of a day-by-day basis, but we’re relooking at every new community opening, looking at making sure we have the right offering in that community. And a litany of additional items to make sure that when we start that community, it’s going to be successful. So, to answer your question without going into all the specifics of the things we’re looking at, but yes, we are looking at all new community openings.
Alex Rygiel
And then I know in the past you’ve changed around, I think it was the deposit requirements that you require. Have you changed those deposit requirements at all? And how does that kind of influence the cancellation rate, if any — if at all?
Dale Francescon
Well, we have increased our deposits, really across the board. And when we look at it from the point that we are highly focused on being a spec builder, we’re not carrying our backlog nearly as long as if we were on a presale basis. So, as a result, I mean, our focus is making sure that we have a committed homebuyer, that we have an appropriate deposit. And most importantly, that they’re qualified and committed to buy the home.
Alex Rygiel
Very helpful. Thank you.
Dale Francescon
Thanks Alex.
Operator
Our next question is from Jay McCanless with Wedbush. Please proceed.
Jay McCanless
Hey, good afternoon. Thanks for taking my questions. The first one I had, it looks like based on the guidance that the average closing price at the midpoint is in, call it, the low 400s now I think versus the high 380s before. Is that just losing some of the complete homes to cancellations? Or is there some — has there been a geographic shift that we need to be thinking about in terms of ASP for the rest of the year?
David Messenger
No, I think, I think if you look at the fact that the first — through the first half of the year, our closing price is about 420. And given that, we’ve already closed essentially a little less than half of our annual guidance at the midpoint. The math works that based on where we’re seeing, what we expect our mixture of complete versus our mixture of communities coming out at an ASP of 400,000 versus where we were at in the first half of the year at 420, the math kind of all makes sense.
Jay McCanless
Okay. And then, when you — when you’re looking at recanceling these land deals, I guess, what is — what are you having to take assumption on right now? Is it where your base pricing is going to be? Is it the paces that you’re seeing? Just wondering, how — if one is, is more of a concern right now, or you’re being more careful on one over the other?
Dale Francescon
I mean, we’re really looking at all avenues, Jay, at this point. And it starts with what are we selling? I mean, we’re homebuilders. We want to make sure we have the right offering for what the consumer wants for that geographic location. So, I mean, it starts with that, but I mean, there’s so many things that go into it that we look at as we continue to stress test the lots. But generally speaking, we’ve been — we got rid of the almost 10,000 lots in the control bucket that we dropped the deals that we just didn’t think met our stringent criteria. And we feel comfortable going forward at this point on where we are, but we’re looking at it all the time.
Jay McCanless
Got it. And then, I know that compete — sorry, complete — tends to compete against the local existing home inventory rather than new homebuilders in the markets. I guess, are you seeing in those smaller markets? Are you seeing an inflow or an increase existing homes or condominiums for sale? I’m just wondering because we’ve seen it in the local markets that inventories have been up sequentially for the last couple months, and wondering if that’s base also in these smaller markets.
Dale Francescon
Yeah. I think, generally the smaller markets operate very similarly. We are seeing that inventory is up, but they’re off such low levels and the amount that they’re up is really not concerning them. They’re still very low. And so, when we look at it on the complete side, oftentimes we may be — the only public homebuilder in that market, there’s typically other new homebuilders, but there are local builders without the resources that, that we bring to bear. And — but we haven’t seen inventory levels be challenging on the complete side or the community side.
Jay McCanless
And then, I guess, the other one, and if you don’t have, we certainly follow-up. But just frame a reference if 380 basis points was the peak in incentives in 2018, maybe once settled back to normal in the 2019 timeframe. Where did incentives move back then versus where they are now?
David Messenger
I’ll follow-up with you Jay afterwards on what a normalized level was, but it was somewhere below that.
Jay McCanless
Okay. Okay. Yeah. That’s all I have. Thanks again.
Dale Francescon
Thanks Jay.
Operator
[Operator Instructions]
Our next question is from Alex Barron with Housing Research Center. Please proceed.
Alex Barron
Yeah. Strong quarter, gentlemen. I wanted to ask regarding starts, how many homes did you guys start this quarter? How did that compare versus last year? And what’s your general thought or approach now that things are a little softer?
David Messenger
Hey, Alex. This is Dave. We’ve historically not disclosed the number of homes under construction or the starts we have. But as we said in the prepared remarks, right now, we’re essentially matching our start pace with our sales in all of our existing communities.
Alex Barron
Got it. Okay. Also wanted to ask, we’ve heard that builders are starting to get more inbound calls from fund and trades. I’m wondering if you guys are seeing an opportunity to get better pricing, if that’s the case.
David Messenger
Yeah. I think everybody understands right now as the industry is pivoting from where it’s been the last 18 months that as more incentives are out there and profits are being challenged, it’s going to work its way all the way through the supply chain into direct costs into labor. And we are seeing opportunities for additional trades and additional suppliers to be working with us and partnering with us in our various markets.
Alex Barron
Okay. And if I could ask one last one, is it your sense that, right now, the slowdown is more just as some have characterized it, more like a shock, that people just kind of need to get used to it, or is it more leaning towards affordability challenges?
Dale Francescon
Our view on this is that it’s — interest rates went up very quickly. People still have to be able to wrap their minds around that buying a home at that payment makes sense for them. From our standpoint, we’re really not seeing that. It’s a huge affordability challenge, where we do have some issues we provided rate buy downs, and other incentives on the mortgage side. And frankly, we think that we’re well-positioned being at the — typically at the lower end of the market, that if someone is priced out of a — of what was a more expensive home, well, then — when they start looking at ours, it becomes much more affordable. So, we think there’s some elasticity there. And that’s why we really like how we’re positioned with regard to our price points.
Alex Barron
Okay. Great. Best of luck for the year. Thank you.
Dale Francescon
Thank you, Alex.
Operator
And we do have a follow-up from Jay with Wedbush. Please proceed.
Jay McCanless
Hey, thanks for taking my follow-up. Just two questions. I guess, the first one, what sounds like pretty good news on labor and input cost and cycle time coming down, how should we expect gross margins to trend in the back half year versus half and maybe year-over-year?
David Messenger
Well, I think, gross margins are going to be trending down, based on where we see incentives coming back into the marketplace. And when — so I think that’s going to put some pressure on margins. The benefits that we may start realizing from trades or other suppliers and other products, if I start contracting for that now, in July, August, September, that’s going to be a 2023 tailwind for me. I don’t know that I really realize that much benefit here in 2022 from those activities.
Jay McCanless
Okay. I guess, just — could you quantify how much the cycle time improved? And are you seeing those same improvements through quarter-to-date and the third quarter?
David Messenger
Yeah. So, in the second quarter we saw — we took about two to three weeks off our cycle times. So, we see that as a positive trend through July. We’ve been experiencing the same thing. We’re almost through the month and cycle times have been pretty consistent with that.
Jay McCanless
Great. Thanks.
Dale Francescon
Thanks Jay.
Operator
We will now turn the line back over to Dale for some brief closing remarks.
Dale Francescon
Thank you, operator. I’d like to take this opportunity once again thank all of our team members for their incredible work and continue dedication to our value suppliers. I’d also like to thank our investors for their time today. We appreciate your continued support and investment, and look forward to speaking to you again next quarter.
Operator
Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.
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