MDC Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: M.D.C. Holdings, (MDC)

MDC Holdings (NYSE:MDC)

Q2 2013 Earnings Call

July 30, 2013 12:30 pm ET

Executives

Robert N. Martin - Vice President of Finance and Business Development

Larry A. Mizel - Executive Chairman and Chief Executive Officer

John M. Stephens - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Ivy Lynne Zelman - Zelman & Associates, LLC

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Eli Hackel - Goldman Sachs Group Inc., Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Stephen F. East - ISI Group Inc., Research Division

Joel Locker - FBN Securities, Inc., Research Division

James McCanless - Sterne Agee & Leach Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Operator

Good afternoon. We are ready to begin the MDC Holdings Inc. Q2 Earnings Conference Call. I will now turn it over to Bob Martin, Vice President of Finance and Corporate Controller. Sir, you may begin your call.

Robert N. Martin

Thank you. Good morning, ladies and gentlemen, and welcome to MDC Holdings 2013 Second Quarter Earnings Conference Call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and John Stephens, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's 2013 second quarter Form 10-Q, which was filed with the SEC today.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.

And now I will turn the call over to Mr. Mizel for his opening remarks.

Larry A. Mizel

I'm pleased to announce second quarter income of $224.9 million or $4.56 per share, marking our sixth consecutive quarter of profitability. Our results include the positive impact of $187.6 million tax benefit related to the reversal of most of our deferred tax asset valuation allowance. We believe that the reversal of our deferred tax asset valuation allowance is a significant milestone as it recognizes our return to more consistent levels of profitability.

Excluding the impact of this tax benefit, our earnings per share would have been $0.76, still far greater than the $0.22 per share we earned a year ago. The improvement was largely the results of our homebuilding operations, as our homebuilding pre-tax operating margin expanded more than 600 basis points to 7.4% for the second quarter.

The strength of our operating margin is again largely the result of significant topside growth of our company. In the second quarter, our home sales revenues grew by 56% year-over-year, reflecting increases in both unit volume and prices as the housing market has improved.

Additionally, our gross margin continued to grow during the second quarter, increasing by 390 basis points year-over-year and 70 basis points sequentially to 18.1%. We are optimistic that we can meet our goal of driving sequential improvements to our gross margin percentage for the balance of 2013, though we continue to monitor the impact of increasing land and building costs on our business.

Our total net orders for the second quarter declined slightly year-over-year based on a decrease in our active community count and our focus on balancing price increases with pace. However, our monthly rate of net orders increased by 23% year-over-year and 7% from the first quarter, even as we increased prices by 2.5% in more than 60% of our active subdivisions during the quarter.

We are encouraged by these improvements, especially in light of recent increases in interest rates we have seen. We believe that the impact of rising rates can be offset by the benefits of an improving economy, especially improvements in consumer confidence that stem from growth in employment and income levels.

After 5 consecutive quarters of sequential declines, our active community count steadied during the second quarter, rising slightly to 140. We still believe that we can increase our active communities by approximately 10% during the last half of the year. Our focus on growing community count is augmented by our entry into new markets.

In the second quarter, we expanded our footprint into South Florida by acquiring lots in a high-end community in Boca Raton. We also closed on lots in Orange County area of Southern California, a submarket we had temporarily exited during the downturn.

Across the country, we have continued to acquire land in an accelerated pace. During the second quarter, we spent approximately $185 million to acquire nearly 2,800 lots in 69 communities across our markets, 32 of which were new. This level of land acquisition activity reflects our highest level since 2006, driving a 16% increase in our lot supply during the second quarter alone to a total of more than 14,700 lots.

Given our strong acquisition activity in the first half of the year, we believe that we have the lots we need to drive significant volume gains in 2014, and we are on track with the lot supply we need for 2015 volume improvement as well.

Thank you for your interest and attention. I'd like to now turn the call over to John Stephens for more specific financial highlights to our 2013 second quarter. John?

John M. Stephens

Thank you, Larry. Our closings were up 37% to 1,183 new homes, with all of our markets experiencing year-over-year increases, much of which were driven by favorable order trends experienced over the past several quarters due in part to a short supply of resale and new home inventories. The strongest volume contributors during the quarter were: Colorado, California, Nevada and Arizona. Our backlog conversion rate remained steady with the past few quarters at 61%, and in line with our historical average.

We continue to generate higher average selling prices by raising prices and maintaining low incentives in most of our markets over the past several quarters as evidenced by the 14% or more than $40,000 per home year-over-year increase in our average selling price to $338,000. On a sequential basis, our average home price was up 4%, or $12,000 per home. We experienced particularly strong price appreciation in Nevada, California and Arizona, which contributed to higher selling prices and also delivered a greater distribution of homes from Colorado and Maryland, which favorably impacted our average selling price as their average price is higher than our company-wide average.

Our gross margins continue to improve with our focus on balancing home pricing increases, with sales pace and measured lot releases. As a result, our gross margin from home sales, including capitalized interest, increased 390 basis points year-over-year to 18.1%, and was up 70 basis points over the 2013 first quarter, which marked our fifth consecutive quarter of sequential gross margin improvement. Excluding interest and cost of sales, our gross margin from home sales was 21.3%, up 440 basis points over last year.

In addition, our gross margins from spec homes exceeded our dirt sales gross margins by more than 100 basis points for the second consecutive quarter, which had given us confidence to build more specs. Also, as mentioned last quarter, all of our projects are either actively selling or currently under development and as a result, substantially all the interest we incurred as capitalized -- was capitalized and therefore, included in our gross margins with very little expense below the gross margin line item. And as we continue to deploy our capital, we will have more assets to leverage these fixed interest costs over.

Our homebuilding SG&A expenses as a percentage of home sale revenues were down 230 basis points to 13.0% versus 15.3% a year ago. The improvement in our SG&A rate was driven by greater operating leverage from a 56% increase in home sale revenues.

The year-over-year increase in our G&A expenses was largely attributable to an increase in incentive-based compensation expense, resulting from a significant improvement in our pre-tax operating results and higher legal-related expenses in 2013. In particular, the 2012 second quarter benefited from a $3.8 million legal recovery, whereas the 2013 second quarter included a $2 million legal accrual charge.

Our commissions expense increased 52% year-over-year, which was consistent with the increase in our revenue and delivery volume, while our marketing expenses declined slightly year-over-year, in part due to delays experienced in opening new communities.

As Larry mentioned, our monthly sales absorption rate was up 23% over the prior year to 3.2 sales per community per month. However, the absolute level of our net new orders declined 4% year-over-year, mostly due to a 21% decrease in our average active community count, whereas the dollar value of our orders was up 12% to $485 million, primarily from our ability to capture price increases over the last several quarters.

In addition, on a sequential basis, our net new orders were up 4%, which bucked our 18-year historical sequential trend, where orders are generally down 1% in Q2 as compared to Q1. The increase in our absorption rate was driven largely by strong increases in California, Nevada, Colorado, Washington and Florida due to stronger demand in these markets, including less competition from resales and lower inventory levels.

And California and Nevada generated our highest absorption pace, each garnering about 5 net sales per community per month. In the West, our absolute order activity was down from the prior year, due in part to the success we had in the Arizona, California and Nevada markets over the last 12 months, with many communities selling out more quickly than anticipated, which caused a decrease in our beginning community count. However, as a result of the robust land acquisition activity that occurred in these markets over the last few quarters, we expect to meaningfully grow our community count in this region over the second half of 2013.

As of the end quarter, our backlog stood at nearly 2,100 homes with the backlog value of $784 million, which represented a 19% year-over-year increase. The increase in our backlog value was primarily the result of pricing increases generated over the last few quarters, combined with a greater mix of Colorado and mid-Atlantic homes in backlog and fewer Arizona and Nevada homes.

In addition, our average home price and backlog was up 15% year-over-year and 4% sequentially to $374,000.

Our active community count increased slightly during the quarter to 140, breaking a streak of 5 consecutive quarters of community count decreases. Our soon-to-be-active communities, which represent communities with construction activity that have not yet sold 5 homes exceeded our soon-to-be-inactive communities for the second quarter in a row. And in addition, this does not include another 81 communities that we own or have under option, where we haven't yet begun vertical construction.

Also, as stated last quarter, there's an element of volatility with opening new communities. The challenges we encounter in opening new communities include obtaining all necessary governmental approvals and permits and other construction issues. That said, the acceleration of our land acquisition activities and the change in our community count trend during the second quarter should bode well for us to grow our community count by the end of 2013.

We will also continue to expect our community count to be up about 10% from the current levels by the end of the year, with most of the net growth expected to be in the West, where our absorption pace has been the strongest and in Florida where we are expanding into new markets.

This next slide summarizes our land acquisition efforts over the last 5 quarters. The 2013 second quarter reached a level not seen since 2006 as we acquired nearly 2,800 lots. And of these lots, 50% were finished, a sharp decline from 75% finished in the first quarter of the year and about 90% finished in the fourth quarter of 2012. As of the end of the year, we owned or controlled over 14,700 lots, which represented a 3.3-year supply based on our last 12-month delivery pace and a 44% year-over-year increase.

Looking forward, we believe that our lot supply is more than adequate to allow for significant top line expansion in 2014, and we have secured a meaningful portion of what we need to continue our growth into 2015 as well. And after the purchase of nearly 8,000 lots over the last 12 months, the company continues to maintain a strong balance sheet with liquidity of over $880 million in cash and marketable securities, and book equity of over $1.1 billion after the reversal of a significant portion of the company's deferred tax asset valuation allowance, which we believe puts us in a position of strength to grow our operations further in the future.

At this time, we'd like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ivy Zelman from Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

Larry, I'm sure you're excited about the DTA reversal and I appreciate your comments about the macro outlook and the impact of higher rates and some of the variables you talked about that can offset those higher rates. Maybe if you can elaborate just on your thoughts as it relates to appreciating the sensitivity with rates where they are today? I know that many of the analysts that are listening were somewhat surprised by some of the other builders that said they did see an impact from mortgage rates spiking, and you've been around many cycles, maybe you can give us some perspective on where you would get nervous. Or is rates alone in isolation not enough to rattle you and appreciating your longer-term perspective on where we are in the cycle? Are we in early innings or in a baseball analogy? Can you give us some of your thoughts, please?

Larry A. Mizel

Looking at baseball, I think we're about in the third inning. This is my fourth cycle. And last time, I got nervous on interest rates, I think the long-term rates had hit 16% and prime was at 22-plus. I recall, when I bought my first house 19 -- I don't know, '73, '74. I was excited to get an 8.5% loan. So these last period of years, I think people are less sensitive to the fact that the history of housing really has taken place during an interest rate period that was much higher than we've enjoyed these last few years. So even though I am sure there is a degree of effect caused by lower interest rates, I don't believe that that's the driving force and really what creates the housing market that we have today. The market today, I would list number one as consumer confidence and the affordability index is at all-time highs in most markets. And I think that our business strategy is both on a relative basis and an absolute basis to grow the company in the markets were in first and then in opportune markets sequentially. This is a great opportunity for all the builders, whether they're public or private, to fulfill a pent-up demand that is in the marketplace and we see being transparent everyday. So I would say, Ivy, I am fully bullish and I believe the facts, not only for our company, but for other companies, both public and private, substantiate that view.

Ivy Lynne Zelman - Zelman & Associates, LLC

Very helpful, Larry. And your decision to go into South Florida, when you think about those markets, you've gone into, like Seattle, through acquisition. Can you distinguish why you would enter that market organically, and maybe what some of the characteristics you were looking for in that new entry?

Larry A. Mizel

We believe that we have an opportunity to grow in a market that seems to be very robust. And really, the demand in where we're going is greater than the ability of the developers, builders/developers to deliver product. And I see pricing in some of these market is substantially higher than you see nationwide. So these are opportunities we look forward in exploiting.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

First question on the -- just to get a little more granularity, hopefully, on the community count growth. If you could give us a sense, the 10% expected increase in the back half from current levels, is that expected to be more 4Q weighted? Or is it going to be more of an even increase throughout the next 6 months? And should we think about a similar type of continued increase into '14?

John M. Stephens

Yes, Mike, it's John. We're just saying we're going to be up 10% by the end of the year. I think as you can see, with getting committees opened, there are things that come up from time-to-time that are challenging. So I think what we would like to say is we're going to be up 10% by the end of the year. And we're going to be up in the markets where we've got, as I mentioned, stronger absorption and more time, more activity, i.e. in the West and Florida.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay. Also, just in terms of the impact of rates, and I appreciate all the commentary in terms of your bigger picture thoughts. But yes, in terms of what occurred throughout the quarter, I presume that there was some, at least on a year-over-year basis, some slowdown in absorption growth or sales pace growth, again, on a year-over-year basis throughout the quarter. Has that stabilized at all into July? And did you have any adjustments to make in terms of incentives? I know you mentioned that pricing was up throughout the quarter or at least in 60% of your communities. Did that change or did that rate of change differ as you got into June?

Larry A. Mizel

I think that we've been in a seasonally slow period. We're very pleased that the effects of the seasonality were very nominal. And I am sure there's some effect of slightly higher interest rates. But with the demand factor, offset by our increased pricing power, we did not notice it to be material.

John M. Stephens

I think the other thing, too, Mike, just to add to that is our June is slightly higher than our May orders. And that was really on kind of a flat community count. So we did not see a decline in June.

Operator

Your next question comes from the line of Eli Hackel from Goldman Sachs.

Eli Hackel - Goldman Sachs Group Inc., Research Division

Sure, just one question. It seems that so far, a lot of the recovery is driven by the supply side of the equation. I wonder if you could comment a little bit on the demand side and if you're seeing demand really start to pick up or how much of the current housing environment is driven by just still continued shortages on the supply side?

Larry A. Mizel

I think we see demand as being steady, and I believe we're optimistic as we come into the fall and you continue to see consumer confidence growing that -- the acceleration in the back part of the year, we're optimistic about.

Operator

Your next question comes from the line of Nishu Sood from Deutsche Bank.

Nishu Sood - Deutsche Bank AG, Research Division

I wanted to ask about the change in the composition of the land you're buying. And you mentioned that in 4Q, it was about I think 80% or 90% finished lots and now it's only about 50% finished lots. And you also mentioned that you're looking out into '15. So I just wanted to understand what is behind that. What's the main factor? Is it in the availability of what's out there, so it's more developed, still available, that's what you're going to be looking at? Is it because your pipeline is already full for '14 in terms of your growth plans? Is it a cyclical play that since we're in the early stages of the recovery, that that's the sort of deals you want to look at? So what's been the main driver of that change?

Larry A. Mizel

The main driver has been availability. We have an open buy order for both categories. And right now, the availability of finished lots continues to, I believe, contract as the market is robust and those that are developing new lots such as ourselves, the lead time will roll into '14, and we're looking for the growth in '15. As I commented in my comments, we believe that our objectives for '14 that are transparent to us and '15 are evolving. And since we have an active acquisition program, we expect to add on to those projections as the weeks and months go by, and what I believe will be the continued strength in the housing market for everyone.

Nishu Sood - Deutsche Bank AG, Research Division

Okay, great. That's helpful. Second question I wanted to ask was on the price versus pace and mortgage rates. Pretty clearly, this quarter, as you indicated, you were prioritizing income by raising prices even if it's -- obviously, crimped volumes a little bit maximizing the returns on those assets. How did that evolve as the quarter went on and rates were rising? And what's your view or how do you expect to handle it, let's say, the mortgage rate trajectory continues in the next quarter or 2?

Larry A. Mizel

I think the market will pretty well predict -- not predict, but the market will pretty well regulate how we go about it. As you heard John, we have a pricing meeting once a week, and what we do is adjust the momentum and the pricing power. And every subdivision in every market is different. So it's not just, okay, we're going to have $1,000 increase across-the-board. It deals with each subdivision being analyzed as to traffic, sales and costs. And all of those factors need to be considered in order to be sensitive to a very competitive market. And we're not alone out there, and the opportunities, we have done what we believe is a very good job of being focused intensely to maximize the opportunities for the company on, not only a current basis, but on a future basis, positioning ourselves for what we believe was a robust period for the industry going forward.

Operator

Our next question comes from the line of Adam Rudiger from Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

My question is, I think you mentioned that you've bought about 8,000 lots over the last 12 months. And so recognizing there some inflationary pressures on land, I was wondering what kind of the gross margins on the newer land was, and if -- what that says to the trajectory for 2014.

John M. Stephens

Adam, it's John. We look at our land deals, we look at every deal based on our evaluation of today's market conditions and on a risk-adjusted basis. And we don't -- we're not going to give out what our current underwriting standards are. That will vary from project to project and by asset by asset.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And then my other question was on Utah. A big community count decline there, and unlike some of the other markets, like maybe Nevada, where you saw a lot of increases, you didn't see a lot of increases there. So I wondering what your plans were for Utah.

John M. Stephens

Yes, in Utah, I looked at that also. We actually had a of close-out communities last year at this time, Adam. So it was probably a lot of communities that we had that were soon to be closing out. And we are restocking there. We're looking at new opportunities there now as well. We like the Utah market and we continue to look for new opportunities there.

Operator

Your next question comes from the line of Ken Zenner from KeyBanc Capital Markets.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Larry, I wonder if you could talk about the West absorption, what you guys talked about and, obviously, it's in your filings at about 4.2 versus 3.2. Given the concept of pace and price within that region, by many other builders, can you talk about how -- if it was a product mix dynamic that was driving that?

Larry A. Mizel

I think in all of these subdivisions, they're different. And since each and every one in the same city, in the same market, even in the same part of town sits differently. And we were fortunate that we were able to have both pricing power and accelerated absorptions in those markets. And I think they're recognized as being robust markets, and we executed in line with what we believed was the market.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

And then given your comments on community growth into year end, I wonder if there's any potential elements you might be able to highlight. I mean, you highlighted that the West and Florida, are going to get the preponderance, but does that have any concept on price and gross margin that you would like to highlight, as well as the land in the West, was that kind of purchased, let's say, it's more finished on a 2 or 3 quarter ago basis?

Larry A. Mizel

I think that we're really in line with where the market is, and the -- going forward, it should be on a relatively balanced basis. And as I commented earlier, it is our goal to expand both on an absolute basis and a relative basis, relative as to the market and absolute as to our position in the market. So that will be highly opportunistic of what we bring to the market at those future periods of time.

Operator

Your next question comes from the line of then Dan Oppenheim from Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering if you could comment about having more confidence in building more specs at this point. How much of that is just sort of -- where you talking about June being stronger than May, is that some of that also, I think, it's better for buyers where there's been a shorter time in terms of contract-to-closing and no worries about sort of rates moving during that time? What's driving that, and should we continue to expect that to increase when we look at sort of third quarter numbers, just even higher level there?

Larry A. Mizel

We believe that the market, if we go back a couple of years, we tried to reduce our specs and increase our land count. Our land starts because the market was discounting through incentives and price reductions of standing inventory. Today, we believe we're in a market that in many circumstances, a standing home, we will receive a higher gross profit margin than a dirt start that might take us 4 to 6 months to deliver. And therefore, we believe that the correct business strategy at this time is to continue with a higher spec level. And there are some markets with some builders that they are not releasing prices until either the foundation or the framing is done. And they do that as a matter of both protecting themselves from price increases and also in order to maximize the current value of the home prior to your delivery versus speculating on a dirt start that, as I said, might be 4 to 6 months out. So I would say our best strategy, and probably the evolving strategy in the industry, will be to go to a higher spec count, which is a pretty good business. It's like going in and ordering a car off the floor. If you want the one, you can take delivery, and not the one they're going to tell you, be in, in a couple of months. So that's the market we're in. And we expect and we'll manage to whatever the market conditions are at the time.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Great. And then I was wondering about some of the comments in terms of the communities opening up in the West. I think if we look at what's happened, there's been a significant drop in terms of the presence that you've had in some Western states, whether it's Nevada or California, and now you talk clearly there are a lot of closeouts just this past quarter. But just how do you think about it from a margin perspective? And we've generally seen that builders often do better when they have a more significant presence within the metro areas or within states. Should we -- are you going to make some efforts here for the future to have certainly more consistent presence in some of these areas?

Larry A. Mizel

I think you should expect that we will expand in all markets we're in.

Operator

Your next question comes from the line of Stephen East from ISI Group.

Stephen F. East - ISI Group Inc., Research Division

If we could switch subjects for a minute. If you, Larry and John, at your pricing that you're getting and talk about how much of that is true price versus mix, and what you're seeing on the cost side and the labor side. Other builders have been giving us how much the price per square foot has gone up versus the cost per square foot has gone up. If you all have those numbers, that would be great to see.

John M. Stephens

Stephen, it's John. In terms of our price increase -- our price change or increase in ASP, it's primarily related to increases we've seen in each of our markets by moving up our prices, as Larry mentioned, this weekly meeting we have to really review every single subdivision. So it's really, the vast majority of the increase in average selling price is not a mix issue, it's more of a price increase issue. And we've been able to offset our increases we've seen on the hard cost side, as well as on the land side thus far. And in terms of getting out a dollar per square foot, probably not going to do that. But I think the point is that you need a pretty substantial increase in your hard costs to offset some of the price increases that we've seen over the last several quarters.

Stephen F. East - ISI Group Inc., Research Division

Okay, that's helpful. And then if you look at your 2013 land spend, one, how much do you want to spend this year? And if you look out a couple of years, your net debt-to-total cap is in great shape. Where would you like to push that as you reinvest in the markets?

Larry A. Mizel

I would say, the market will determine the pace that we'll travel, keeping in mind that we're a conservative company. Also, we have commented that we are going to grow and we're going to grow as aggressively as the market allows us to continue with the standards that we have when we underwrite and execute the land buy rate, I believe, over the next period of time should be able to possibly expand. And it will depend, of course, of what's going on in the back end, which deals with absorptions. But we have the balance sheet and the resources to do substantially more than where we're at subject to market conditions, which I believe will support the growth that the industry is enjoying, and we expect to participate in line with that.

Operator

Your next question comes from the line of Joel Locker from FBN Securities.

Joel Locker - FBN Securities, Inc., Research Division

Just curious on the existing side, seeing inventory up in the last few weeks around San Diego, where I live. And just was wondering if you're seeing a little more competition from the existing home market.

John M. Stephens

I think, Joel, as we mentioned earlier, we really haven't -- I mean our order trends remained pretty consistent throughout the quarter. There's always competition out there, but nothing unusual or material, as Larry mentioned earlier.

Joel Locker - FBN Securities, Inc., Research Division

Right. And just a follow-up question on -- how many communities did you open and close in the second quarter, and how many do you have slated to open in 2014?

John M. Stephens

We have not given out any information, Joel, for 2014. But in terms of opened and closed, I think it was about -- Bob, do you have that number?

Robert N. Martin

We can you give you that in just one second.

John M. Stephens

Okay. So we'll get back to you on that one.

Operator

Your next question comes from the line of Jay McCanless from Sterne Agee.

James McCanless - Sterne Agee & Leach Inc., Research Division

First question, Larry, in previous cycles, have you ever seen spec homes have this kind of scarcity premium like you're seeing now? And if so, how long in terms of months did that scarcity premium usually last?

Larry A. Mizel

Well, I think in prior cycles, we didn't have the robust growth in previously distressed assets that we have now. The first homebuyer, really, the price point of those homes, generally, now seem to be a resale of distressed product. So you have new home average sales prices, I think, substantially higher than the prior cycle. And I think the intensity will last for a period of years, considering that we have a substantial accumulation of demand that has not been satisfied because of the economy and the market circumstances in the economy for a period of maybe 2 or 3 years. That is something that will take a period of years to adjust. The new sales of single-family detached home, I don't know, is -- we'll be fortunate to exceed 50% of the base demand rate next year. So you have some runway in front of you, and that'll all the affected on the speed in which the builders are able to the deliver to the demand that the market is demonstrating.

James McCanless - Sterne Agee & Leach Inc., Research Division

Okay. My second question is what do you all estimate is your mix of move-up versus first-time buyers now? And with the land that you're buying, where do you anticipate that mix going over the next 2 to 3 quarters?

Larry A. Mizel

I think it's -- I hate to use the answer we're at where we're at, but the industry and the average sales price of where we are is probably a base point of what we see for the next year. It is not -- or I think it's clear that the public builders are really trending to a higher average sales price, which is in line with the market demand. And I am confident that the price points will continue to stay in the affordability factor for a period of years until the affordability index reverses itself. And you can track that, which will give you an indication of when there begins to be a slowdown in those -- the demand because you've pushed prices too far, but you have the benefit now of an expanding mortgage market. Previously, everyone had commented on how difficult it is to get a mortgage. The requirements are pretty simple. You need a job, you need good credit, you need a full set of documents, and you need a reasonable down payment. I think those are pretty good underwriting criteria. And as the mortgage market goes in a more private direction away from the government programs, and that may take 5 years, it may take 10 years. The mortgage industry is rebuilding itself even though it is slowly rebuilding itself. There'll be more product available, which will be able to capture a larger segment of the buyers than we've seen for the last year or 2. So that's a positive factor, even though people seem to focus on higher interest rates and the difficulty in getting a loan. If you have good credit, and a down payment and a job, I don't think those are difficult requirements for buying a new home.

Operator

Your last question comes from the line of Ivy Zelman from Zelman & Associates.

Ivy Lynne Zelman - Zelman & Associates, LLC

Larry, just as you elaborated on the underwriting versus what should be the case, or if it's not that, needing a job and some of the simplistic ways that you described it, has it changed at all, relative to last quarter, in your opinion, where you've seen a modest easing? Or would you say it's been pretty steady? And then secondly, there's been some concern that large PE firms are no longer buying as much distressed REO in the market and for that reason, they've been the incremental buyer of that distressed asset and that would cause pressure on new home prices. And I certainly can't draw that line to the concern, but can you address it because I know many clients have suggested that, that's a risk to the new home market?

Larry A. Mizel

Well, I think the opportunity for the market, in general, is those individuals that were fortunate enough to buy distressed product are able to reenter that product into the market at a very substantial price increase. As you see, rental is going up, then those that are in the business of renting homes have a greater incentive for holding that home for a longer period of time because their cash flow was increased. And I think it's proven to be a very successful business model, those that were able to take advantage of it. The availability in mortgages, we continue to see the banks moving into very conservative, but moving back into jumbos and nonconforming for both their own balance sheet and to securitize it. So I think we're on trend. The banks in United States continue to get stronger. And one of the few places you can put money out at low risk and get a reasonable return happens to be housing. And so I see a lot of that happening and more so, in the future. I do not expect that as some of the homes that were taken off the market by investors are reentered into the market, that it will have an effect or a material effect on new home sales because after all, a new home is the 2013 version and the prior homes aren't fresh. Even if they're painted fresh, they don't have the feeling and the look of a new home. And many, many consumers want to be the first owner of a home, not the second home -- second owner of a home. And I think that there'll be -- a substantial amount of those persons that move into the rental of those homes will end up being the buyer because they'll have a unique opportunity as their credit has been rehabilitated, they are able to buy. And so these are really a combination of converting for our country, more renters into homeowners because their option is to step up and buy versus to look at a rental where the rental rates, as we see, are becoming -- continue to be under pressure of higher rents, not lower rents, which creates a greater value for those that bought the distressed asset. In the new home market, I don't see that product being competition to what we're building and what the other builders are building, except on a very, very limited basis.

Operator

Your next question comes from the line of Michael Rehaut from JPMorgan.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

John, I just wanted to go back to your comment, I think at the end of my question earlier about June being slightly higher than May on a -- and that's despite -- or with community count being flat -- flattish month-to-month. Any thoughts around what drove that if it were particular regions, or maybe new communities replacing older ones in certain areas that maybe had a positive impact on sales pace?

John M. Stephens

No. I just think it was -- we just did a little better in June. There was really nothing that was, in particular, Mike, that -- a bunch of new communities that opened. In fact, one of the questions earlier was how many we activated and how many we closed. We activated 31 communities during the quarter, and we deactivated 30. So in terms of anything unusual there, nothing in particular.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

And have you seen that consistency continue into July?

John M. Stephens

Well, I think at this point, Mike, our practice has been not to really comment on the interim quarter, especially when -- excuse me, interim month, when a month is not complete. So really, nothing to report there at this point in time.

Operator

Your next question comes from the line of Alex Barrón from Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I just kind of wanted to get your take on what you think would be the direction of margins as we go into next year? I know this back half of 2013 really appears that margins should continue to expand because of what's in backlog. But if the mortgage rates stay where they're at, and do you anticipate that pricing power would flatten out and therefore, margins might be under pressure next year? Or what are your thoughts?

Larry A. Mizel

Our thoughts are that we'll report as it occurs versus guess on projections.

Operator

And there are no further questions on queue at this time. I turn the call back to Mr. Martin.

Robert N. Martin

Thank you. One housekeeping item. A question was asked about the subdivisions that became active versus became inactive. There's 31 that became active and 30 that became inactive.

And with that, we are done for today and we look forward to seeing you after the release of our third quarter earnings. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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MDC Holdings (MDC): Q2 EPS of $0.76 beats by $0.21. Revenue of $402.2M beats by $8.25M. (PR)