DR Horton Management Discusses Q3 2012 Results - Earnings Call Transcript

Jul.27.12 | About: D. R. (DHI)

DR Horton (NYSE:DHI)

Q3 2012 Earnings Call

July 27, 2012 10:00 am ET

Executives

Donald J. Tomnitz - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

Stacey H. Dwyer - Executive Vice President, Treasurer and In Charge of Investor Relations

Bill W. Wheat - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Mike Murray

Analysts

Daniel Oppenheim - Crédit Suisse AG, Research Division

Michael Rehaut - JP Morgan Chase & Co, Research Division

David Goldberg - UBS Investment Bank, Research Division

Stephen Kim - Barclays Capital, Research Division

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

Will Randow - Citigroup Inc, Research Division

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Alex Barrón - Housing Research Center, LLC

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

Joel Locker - FBN Securities, Inc., Research Division

Michael Rybak

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning, and welcome to D.R. Horton, America's Builder, the largest builder in the United States, Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Donald Tomnitz, President and CEO. Thank you, you may begin.

Donald J. Tomnitz

Thank you, and good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO; Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Vice President and Controller. Before we get started, Stacey?

Stacey H. Dwyer

Some comments made on this call may constitute 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 issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and our most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Don?

Donald J. Tomnitz

D.R. Horton posted its highest quarterly pretax income since the second quarter of fiscal 2007, the highest in the industry, earning $72 million this quarter and $144 million year-to-date. Our pretax operating profit margin for the third quarter was 6.3%, the highest since the fourth quarter of fiscal 2006. For the 10th consecutive year, we are the largest builder in the United States based on homes closed.

Our net sales orders improved 25% from our third quarter last year and 3% sequentially from the March quarter. Our average sales price increased during the quarter, driving a 32% increase in the value of net sales orders compared to the year-ago quarter. We've seen solid positive year-over-year sales comparisons continue into July.

Our sales this quarter resulted in a 31% increase in our backlog units and a 40% increase in backlog value compared to the prior year, which puts us in a strong position for increased revenue and profitability in the fourth quarter of fiscal 2012.

In response to our sales growth, we're putting our liquidity to work by increasing our investments in homes under construction, finished lots, land and lot development. These investments are fueling our profitable growth even though macroeconomic conditions remain soft and overall housing demand is at historically low levels.

We are finding opportunities to take market share in existing markets while evaluating attractive new submarkets. Our entry-level business remains strong while we continue to expand our product offerings for move-up buyers. Bill?

Bill W. Wheat

In the third quarter, our homebuilding operations generated pretax income of $58.3 million compared to $22.2 million in the year-ago quarter. Our financial services operations generated pretax income of $13.9 million compared to $6.7 million in the year-ago quarter.

Our net income for the quarter increased to $787.8 million or $2.22 per diluted share, which included a noncash tax benefit of $716.7 million from a reduction of the valuation allowance for our deferred tax asset. We will discuss the valuation allowance reduction in more detail later in our prepared remarks.

Our diluted share count this quarter included 38.3 million shares related to our convertible senior notes. When these shares are dilutive, they are added to the diluted EPS denominator, and the associated interest expense and amortized issuance costs are added back to net income to calculate diluted EPS. For these shares and the related costs to be included in our diluted EPS in the fourth quarter, we estimate that our net income would need to be approximately $85 million. Mike?

Mike Murray

Our third quarter home sales revenue increased 14% to $1.1 billion on 4,957 homes closed, up from $974.5 million on 4,555 homes closed in the year-ago quarter. Our average closing price for the quarter was up 5% compared to the prior year and up 2.5% sequentially to $225,000. In the fourth quarter, we expect that our backlog conversion rate will be in the high 70s to 85% range. Don?

Donald J. Tomnitz

Net sales however for the third quarter were up 25% from last year to 6,079 homes, a 5% decrease in active selling communities. Our average sales price on net sales orders of $232,300 was up 6% compared to the prior year quarter and up 4% sequentially.

Our cancellation rate for the third quarter was 23%, which is very close to our predownturn cancellation rate range of 17% to 21%. Our sales backlog at June 30, 2012, increased 31% from the prior year to 7,311 homes. The value of the backlog increased 40% to $1.7 billion from $1.2 billion a year ago.

With 7,311 homes in backlog and continued year-over-year improvement in sales through the first part of July, we expect stronger closings and pretax profits in the fourth quarter both sequentially and compared to the prior year. Bill?

Bill W. Wheat

Our gross profit margin on home sales revenues in the third quarter was 18%, up 150 basis points from the year-ago period. 130 basis points of the increase was due to decreased incentives and discounts and increased average selling prices, and 50 basis points of the increase was due to lower amortized interest and property taxes. These increases were partially offset by a 30 basis point decrease due to higher estimated cost for warranty and construction defect claims as a percentage of home sales revenue. Our expectation for fourth quarter home sales gross margin is around 18%, consistent with the third quarter. Stacey?

Stacey H. Dwyer

Homebuilding SG&A expense for the quarter, which includes corporate overhead, was $136 million or 12.2% of homebuilding revenues compared to $114 million or 11.7% of homebuilding revenues in the prior-year quarter. The SG&A category that increased the most as a percentage of revenue was incentive compensation, reflecting our significantly higher revenues, profitability and share price versus a year ago.

For the 9 months ended June 30, 2012, homebuilding SG&A expense was $383 million or 13% of homebuilding revenues compared to $356 million or 14.4% of homebuilding revenues in the prior-year period.

In our fourth quarter, absolute SG&A expense will increase due to variable components. However, we expect our SG&A as a percentage of homebuilding revenue will improve both sequentially and year-over-year as we close more homes and leverage our fixed cost structure. Mike?

Mike Murray

Homebuilding interest expense was down 39% from the year-ago quarter to $6.2 million. Our third quarter homebuilding interest incurred improved slightly to $31.1 million from $31.4 million a year ago even after issuing an additional $350 million of senior notes in May. Our capitalized interest balance at June 30 totaled $81.2 million.

Financial services pretax income for the quarter was $13.9 million. 84% of our mortgage company's loan originations during the quarter related to homes closed by our homebuilding operations. Our mortgage company handled the financing for 60% of our homebuyers this quarter, with virtually all loans meeting eligibility requirements for sale to Fannie Mae, Freddie Mac or Ginnie Mae.

FHA and VA loans accounted for 55% of our mortgage company's volume this quarter, down from 62% in the year-ago quarter. Our mortgage company's new borrowers during the quarter had an average FICO score of 708 and an average loan-to-value ratio of 91%. First time homebuyers represented 54% of the closings handled by our mortgage company this quarter. Bill?

Bill W. Wheat

We reduced our deferred tax asset valuation allowance by $716.7 million this quarter. This reduction was based on our evaluation of both positive and negative evidence, in which we determined that it is more likely than not that we will generate sufficient income in future periods to realize the substantial majority of our deferred tax assets.

The positive evidence included our 5 consecutive quarters of pretax income, the strong profitability and sales both the current quarter and the fiscal year-to-date period and an increased backlog, which positions us for increased income in our fourth quarter. In addition, with our solid balance sheet, reduced debt and interest cost, ample liquidity and growing inventory, we expect to be able to sustain and increase our pretax income in future years.

Even if our future pretax income remains flat with current year levels, we estimate that we will utilize all of our federal net operating losses in less than 5 years.

The negative evidence included the losses we incurred during the housing downturn, the current weakness in the economy, historic low levels of activity in the housing market, the restrictive mortgage lending environment and our lower-than-normal gross margins.

One of the most significant pieces of negative evidence that existed in prior periods, a 3-year cumulative loss position, is not as significant now as we are in a 3-year cumulative income position at June 30.

We concluded that the positive evidence outweighed the negative evidence, and we reduced the DTA valuation allowance by $716.7 million. Our remaining valuation allowance of $78.4 million relates to 2 factors. First, certain state net operating loss carryforwards may not be realized due to shorter carryforward periods in those states. Second, a portion of the valuation allowance reduction has been allocated to our expected fourth quarter income. We expect to reduce this portion of the valuation allowance next quarter, resulting in minimal income tax on our fourth quarter income statement.

Beginning in the first quarter of fiscal 2013, we expect to report income tax expense at a tax rate of 38% to 38.5%. Until we have utilized our NOLs, the majority of the tax expense recorded will not require cash, but will reduce the carrying value of our DTA. Stacey?

Stacey H. Dwyer

Since March, our total inventory increased by approximately $228 million excluding noncash items, reflecting a $133 million increase in homes and inventory and a $95 million increase in our investments in residential land and lots. Our homes and inventory at the end of June totaled 12,200 homes, up 1,100 homes for March. As of June 30, 1,100 of our homes were models, 5,600 were speculative homes and 2,100 of the specs were completed. During the quarter, we sold our spring inventory and grew our backlog, improving our spec percentage to 46% from 50% at March 31. Don?

Donald J. Tomnitz

Our third fiscal quarter investments in land, lots and development costs totaled $389 million, that reflects our ability to find new communities, replenish our finished lots supply. During the first 9 months of the fiscal year, we spent $938 million on land, lots and development costs, which is up from $582 million in the same period of the prior year.

We continue to purchase our option finished lots in many markets and are also selectively investing in land acquisition and development opportunities to ensure we have adequate lot supplies in desirable markets.

At June 30, 2012, we control approximately 131,000 lots, of which 90,000 are owned and 41,000 are optioned. Our owned lots include 23,000 finished lots and 24,000 lots to be developed within the next 12 to 18 months. Our optioned lots consist of 25,000 finished lots and 16 lots that we expect to purchase and develop within the next 12 to 18 months, bringing our minimum pipeline of finished lots over the next 2 years to 88,000, which is up 13% from the second quarter and 24% from a year ago. Mike?

Mike Murray

We used $95 million of cash in operations in the June quarter, primarily due to increases in homes and inventory and residential land and lots, offset by pretax income and an increase in accounts payable. We ended the quarter with $1.2 billion of homebuilding unrestricted cash and marketable securities. The balance of our public notes outstanding at June 30 was $1.9 billion. Our next maturity is approximately $1.72 billion in May of 2013.

At June 30, our homebuilding leverage ratio, net of cash and marketable securities, improved 160 basis points to 18.3% compared to 19.9% a year ago. Gross homebuilding leverage at June 30 improved 470 basis points to 35.8%. Don?

Donald J. Tomnitz

Thank you. Fiscal year '12 has been a pivotal year for our company, in which we reestablished our industry-leading profit levels and began to take advantage of the flexibility provided by our strong balance sheet. We transitioned from defense to offense, raising new capital, investing our cash in the business, improving our operating margin and growing our profits. We believe these are the initial stages of long-term growth for D.R. Horton.

D.R. and I would like to personally thank our employees for their hard work and accomplishments. You've kept us in the #1 builder slot for the past 10 years. We are better positioned than we've ever been in my 29 years with D.R. Horton. We're excited by the opportunities we see in fiscal 2013 and beyond. And as I always say as I travel around and meet all of our sales people, kick tail.

This concludes our prepared remarks and I'll host any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Dan Oppenheim with Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering, I think your last comment there about sort of the directions to the employees there in terms of kicking tails is interesting. In terms of that, I guess how does that relate to thoughts on the backlog conversion? And how much of that is a function in terms of specs versus the constructions? Is there much that you can do in terms of working on that one for fiscal '13, if you can provide a little more color on that.

Stacey H. Dwyer

Sure, Dan. One of the things that we look at on our backlog conversion is really just going back predownturn. And our expectations will trend back to the backlog conversion rates that we've traditionally seen. And those rates would typically be between about 55% and 65% in quarters 1 through 3, and then quarter 4 could be up into the 70%, possibly into the low 70% range. We've been in an accelerated backlog conversion rate because our spec levels have been higher. As we went through the downturn, we had a higher level of completed specs than we currently have, and so those were available for a very quick sale and quick close in the same quarter. We would expect that to begin to slow down a little bit as we focused on reducing our completed specs. And the other thing we're seeing is more build to order. Sales come in and those typically stay in backlog a little bit longer because we actually work through the permitting process, people selecting their options before we begin the construction on the home. And so our expectation is for Q4 that the backlog will still remain in the high 70s to the 85% range, but going into next year, we are going to actually see that continue to trend down a little bit.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Okay, great. I guess the second question is. Relating to that you talked about bringing down some specs, more build-to-order and a lot of other builders talking about more pricing power as you think about the pure specs and more build-to-order and potentially pricing depending on your focus there versus the orders. How are you thinking about margins as you're looking forward in a potential for some -- further improvement over the course of the year?

Donald J. Tomnitz

First of all, I would say too that we are not going to be decreasing our spec level from our historical levels. Typically, we're running somewhere between 50% to 60% specs, depending on which quarter of the year it is, and we anticipate that we will increase our specs in the first calendar quarter of fiscal year '12 in anticipation of the selling season, which historically starts in the second quarter. Clearly, we moved a lot of older specs this quarter, which was a remarkable accomplishment. It was even more a remarkable accomplishment that we increased our gross margin while we moved those older specs. But on a historical basis, our build-to-order business has been a higher margin business for us, so as we transition into fiscal year '13, I anticipate that we will have some upside in our margins just simply because of the mix change in build-to-order versus spec and also combined with the fact that we've gotten rid of a lot of older specs that -- and cleansed our spec backlog.

Operator

Our next question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JP Morgan Chase & Co, Research Division

First question, I want to go to the comments you made right at the beginning of the call, Don, in terms of increasing investment, trying to take share, looking at potential new submarkets. And I think you also said expanding the move-up buyer segment. Looking now at those statements as a whole, is that something that we should take to expect in acceleration in community count growth in 2013?

Donald J. Tomnitz

Absolutely. We continue even though we're closing more homes than anyone else in the industry and we were able to add to our lot supply as we indicated in the most recent quarter. We clearly are going to be buying land and developing lots where it makes economic sense for us. Fortunately, in a lot of our markets, we're still able to execute option contracts.

Michael Rehaut - JP Morgan Chase & Co, Research Division

Okay. And in terms of the comments you just made around spec and going back earlier to comments around move-up, it seems like historically, you guys have -- a healthy part of the business for you, and I think one of the core competencies for you as a company is your comfort level with spec as a part of the business. Is this shift towards more build-to-order something that's just more temporary? And maybe you could put into perspective how spec is going to be as a percent of the business in 2013 versus 2012 and maybe historically.

Donald J. Tomnitz

Clearly, our build-to-order business is being driven by our customers. There are a number of people who are coming in who are either retirees or they're buying their third home. And clearly, their desire is of having their home their way, that's what we're accommodating. On a go forward basis though, as I said earlier, we are going to continue to maintain and as you said, we are comfortable, we have always been a spec builder and we are comfortable with our specs. We will continue to maintain, depending upon which quarter of the year it is, a spec ratio somewhere of 50% to 60%.

Michael Rehaut - JP Morgan Chase & Co, Research Division

And so, how would that compare against 2012 then?

Donald J. Tomnitz

Well in 2012, the percentages really haven't changed frankly even during the downturn because there are period of time last year in 2012, certainly in 2011, where we were running 61%, 62% specs. So it just all depends upon what we see in the marketplace. And one of the things that has brought us to where we are today is we were willing, during the downturn, to put our specs out there and have homes available especially we saw that pretax credit, and those are one of the things that led us to having such a successful '11 or '10 was having the homes on the market to take advantage of the tax credit when our competition really did not.

Operator

Our next question comes from the line of David Goldberg with UBS.

David Goldberg - UBS Investment Bank, Research Division

My first question has to do with the financial services business and specifically the capture rate. And what I'm trying to get an idea about is, folks who don't use your mortgage product. Do you have any visibility on why they do or don't use the mortgage product? And how that group, maybe just some color on -- from a statistics or metrics standpoint, what the credit quality of that group looks like? Why they choose to go outside to a different mortgage vendor and how the process actually works?

Donald J. Tomnitz

Well, a number of our buyers come in preapproved by some other mortgage company, and that's one of the major drivers of someone not using our mortgage company. We also have an association with the SAA, where basically, they are also offering their mortgage company to our buyers. And many of their -- all of their buyers are military or ex-military buyers, and they offer an incentive for their buyers to use their mortgage company. Our mortgage company has always been in the business of absolutely competing with the competition. They don't really have any upside, they don't really have any downside. They're just out there on a daily basis having to earn our business. So to the extent that someone must use an outside mortgage company, that's fine with us.

David Goldberg - UBS Investment Bank, Research Division

Just to make sure I understand, is it fair to conclude that you don't think the folks that are going to outside mortgage providers have a better credit profile than folks who are going to your internal mortgage provider?

Stacey H. Dwyer

We don't necessarily have a clear visibility into that, David, but I would be surprised at this point. I mean, mortgage standards are pretty consistent across all of mortgage products right now especially ones that are backed by the governmental industries and that tends to be the majority of the market. One other factor that impacts our capture rate is we don't have our mortgage company in every homebuilding market where we operate. So there's certain segments of our business that we just won't capture.

Donald J. Tomnitz

And certainly I don't think, if you're inferring that perhaps the people who use our mortgage company have lesser credit qualification, that's not the case. And if you look at the solid results of our mortgage company in a great view, millions of dollars they've had to reserve against billions of dollars of mortgages they have issued over the year. The quality of our buyer going to our mortgage company is extraordinarily high.

David Goldberg - UBS Investment Bank, Research Division

And I wasn't trying to infer anything, I just want to understand.

Donald J. Tomnitz

Just double checking.

David Goldberg - UBS Investment Bank, Research Division

Yes, exactly. I wouldn't make any inferences. Certainly not. My follow-up question. I wanted to delve a little bit more into this whole concept of looking into new markets. And I'm wondering if we can kind of go over the analysis besides performance and think about new markets, what are the kind of puts and takes on the decision-making process? What makes a market attractive? What makes it less attractive kind of just give us more of a view on how you're thinking about it.

Donald J. Tomnitz

Well largely, it's -- that's dependent on our regional presence because obviously, they spend a lot more time in those specific markets than D.R. and I do. Although D.R. and I clearly bless every one of the new markets that we enter, but clearly, what we're looking for is an opportunity to go -- when we go into a new market is to make a major -- take a major position in that market. Typically, the market is underserved by a production builder or not served by a production builder at all, where we can go in and actually provide the homebuyers in that market with a more competitive house and a better built house with a better margin. So one of the things that we focused on at Horton over the last couple of years is moving into what I call ancillary markets or tertiary markets and I have another name for them, which I won't use for in the conference call, but they're smaller markets. And I think with our low overhead, we can go in and take lot position, so they're smaller than many other builders and to be able to offer the buyers in that market an extremely competitive value. And I think you're seeing that in a number of markets where we have gone into in the Carolinas and in Florida where we don't find competition for many other builders, certainly not production builders

Operator

Our next question comes from the line of Stephen Kim with Barclays.

Stephen Kim - Barclays Capital, Research Division

I was wondering if you could comment on your community count change. I know you won't give the actual community count number, but it was down 5%. Obviously, that's a high-class problem because you've been selling a lot of houses and I understand that. At the same time, I was wondering if you had an internal goal or a target to significantly ramp up your communities as you head into next year. And if so, how you gauge that or how we should be looking at that in terms -- is it in terms of just the gross number of communities that you expect to open? Or is there a sort of a net year-over-year number that we can think about?

Donald J. Tomnitz

The way we look at new community count is each one of our division presidents and each one of their markets are charged with how do they become the #1 builder in their market, all the while focusing on our #1 goal which is profitability. So as I tell each one of our division presidents and the role they're taking, is how do we tie up and contract for any and all lot positions in that market that makes sense for us to build that product and if it's a profitable transaction for us. So we're trying to expand our subdivisions in each one of our markets as aggressively as the business will support.

Bill W. Wheat

Clearly, with our increase in investments in land and our increases in our option lot positions. We are targeting increases in our overall community count. You are correct that with our increased sales this year, we have probably rolled out of more communities than we might have anticipated at the start of the year, so the net count has not increased quite as much as we had maybe originally planned, but with the increased investments, we expect to be growing our community count sequentially as we move in to 2015.

Donald J. Tomnitz

Some of those community counts are relative, Steve. Basically, some markets are a lot easier to sign up contracts on finished lots or option lots or even land deals, which take less risk and less capital than other markets like California in particular. That market seems to me from a land perspective is overheated right now, and it takes big dollars and there's a higher risk, given the state of California's economy. We're trying to choose land and lot positions in low-risk areas to provide us the best return.

Stephen Kim - Barclays Capital, Research Division

Okay, great. And then secondly, I was wondering if you could talk a little bit about the appraisal situation in the industry. I think when I spoke with you last time, you had indicated that, that was an ongoing annoyance, but it was still something that was weighing, it seemed, fairly heavily on your assessment of the overall market conditions. I was curious if you could give us a sense for whether that's still your view that the appraisal process is a meaningful impediment or if you've seen some amelioration in that regard.

Stacey H. Dwyer

We wouldn't call that a meaningful impediment. We do still continue to see challenges with the valuations on appraisals, more specifically with the VA loans than with other loan products. And there are a handful of markets that seem to have more ongoing challenges than some other markets. But generally, it's just an ongoing annoyance, but not a huge impediment.

Donald J. Tomnitz

In fact, I think as you begin to see and who knows whether the calcs are right or not, but as people begin to report some increase in average sales prices or median prices in various markets, that's going to solve the appraisal issue substantially for all builders.

Operator

Our next question comes from the line of Ken Zener with KeyBanc Capital Markets.

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

I think you mentioned a 5-year recovery on your DTA. Was that one of your assumptions?

Donald J. Tomnitz

If our income remains flat with fiscal 2012 levels, we expect to be able to recover our federal NOL carryforwards. That's a portion of our DTA. Our federal NOL carryforwards will capture that in less than 5 years.

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

Just for housekeeping, what portion of the $716 million is that?

Bill W. Wheat

It's between $200 million and $300 million.

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

Okay, so it's a pretty small piece.

Bill W. Wheat

It would be the second largest piece in the DTA.

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

Well yes. So given the fact that you have relatively low net leverage today, you're optioning your land finished and/or otherwise. When do you think you're going to be able to get back to a more -- and it sounds like you're more confident obviously. When do you think you're going to get back to a more effective rate of leverage, given that you're tying up these lands through options. And if you're not going to be targeting a 40%, let's say, net debt to cap, what are you going to be doing with the capital?

Donald J. Tomnitz

I can tell you right now we're really comfortable with our net debt to cap, Ken. And our focus is on how we continue to grow the business without increasing our leverage significantly.

Bill W. Wheat

We have a lot of flexibility obviously right now. If the market's there and the demand is there, we have the ability to invest a lot with our balance sheet, both in our liquidity right now and the ability to add additional debt in the future. But right now, we're increasing our investment significantly, and our leverage is still holding in there at a pretty low level. Of course going forward, we also plan on making a lot of money, and to the extent that we generate a lot of profits in the future, that adds to our equity, which helps keep our leverage in balance as well.

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

Okay. And I guess the second question I have, when you talked about sequentially your gross margins went up a bit, but could you give us a bit kind of the sequential -- I mean, if you were getting rid of your finished spec depletion, what was that kind of drag sequentially, given that, I think broadly, we're seeing incentives decline sequentially, which has helped builders' gross margins move up? And you guided at 18% gross margin in 4Q. Is that -- why wouldn't we see a little more lift sequentially? And how much of the land is new -- the spread?

Bill W. Wheat

Sure. On the sequential increase, it was about 40 bps from Q2 to Q3. The entire amount of that increase is due to pure core margin improvements attributable to fewer discounts, some increases in average selling prices that we've been able to implement in some of our markets. And so it's just a very simple improvement in core margin. Specs are always a portion of that, but as Don mentioned earlier, we have reduced our -- some of our aged completed specs, and we're starting to see improved margins on our specs this quarter relative to some prior periods in the past.

Donald J. Tomnitz

And a lot of that has frankly to do with the low new home inventory basically. Across the nation, we're down to 4.7 months supply of new homes. We have pricing power in a number of our markets, not as significant as what we had back in '04 and '05, but I'm not sure we need to get back to that point. But nevertheless, we are having pricing power in most of our markets which is improving our gross margins.

Bill W. Wheat

And obviously, we sound -- we certainly sound more confident in our guidance on margins today because our trend has been positive here for a couple of quarters, and the driver of the improved margin is truly based on our core operations. So that's what's driving our guidance to be able to hold the margins that we have today. But clearly, our goals are to continue to improve margins over and above the 18% we reported this quarter.

Donald J. Tomnitz

Our company goal has always been 20% gross margins. We're working toward that, but we're not going to be tell you we're going to be there next quarter, but we're working on it.

Operator

Our next question comes from the line of Will Randow with Citigroup.

Will Randow - Citigroup Inc, Research Division

I just had a question on your SG&A level. When we talked in the past, you talked that -- you mentioned you want to run it around 10% as your goal as a percentage of housing sales. However you're running in low teens because you cut it quite a bit. Is there a potential to get below 10% in the next couple of years if we continue to see this recovery?

Bill W. Wheat

That would be a stretch. We would expect we'll be in the -- we'll be in the 12s this year, which is going to be a good improvement versus last year. As we continue to add volume, we clearly have more room to leverage our SG&A infrastructure on the fixed cost side, and so we would expect to continue driving that down. But our company goal remains at around 10%. We have had some short periods in the past when we've been below 10%, but those have typically been periods and we've seen significant selling price increases that have driven that. But to the extent we're able to drive it towards 10%, that will be in line with our targets.

Will Randow - Citigroup Inc, Research Division

And then on kind of the first-time homebuyers statement as well as the lending environment. Given your lower average ASP, you might be targeting call it the slightly less affluent buyer, for lack of a better term. So really, how do you open up that segment of the market? And do you plan to get heavier into the first-time homebuyer?

Stacey H. Dwyer

Yes. Right now, we are very concentrated with the first-time homebuyer. We've typically been running between about 50% and 55% of our business to the first-time homebuyer. In terms of opening it up, that's been actually the most consistent part of the homebuyer population, and one of the things that we're looking to do is not necessarily to decrease the number of homes and the number of first-time homebuying customers that we have, but rather to increase incrementally the product that we have available and the number of people who are buying more of a move-up product. So our goal is actually for that percentage to work its way back down closer to the 35% to 40% historical range as we see the higher end of the market recovering.

Will Randow - Citigroup Inc, Research Division

I was just curious because obviously some of the harder-hit markets on the lower income side of things than most, but appreciate the color.

Operator

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

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

In one of the answers to a previous question, you mentioned getting some pricing power in some of your markets and if I recall from last quarter, I feel like the tone was a little bit different. So I was wondering if I was interpreting that correctly if you think that sequentially the markets changed and you've gained some power for the last quarter's earnings?

Bill W. Wheat

Yes, we do, clearly.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And secondly, I just wanted to clarify some of the comments made in the opening statements about the SG&A. You mentioned that the fourth quarter should be higher on an absolute basis. I was wondering if that was sequentially higher or year-over-year higher. And I was also wondering if you could just clarify that if most of the year-over-year increase this year, was that solely incentive-based comp that you mentioned?

Bill W. Wheat

We will see an increase both sequentially and year-over-year, as we'll have a higher activity level, more homes closing, more revenue and that results in more sales commission and more activities around the home construction. But we'll also see a bigger piece of that increase being incentive compensation, both to increase revenues, profitability as well as share price adjusting some accruals.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

To be clear, the main driver of the year-over-year increase this year, would you -- is incentive-based comp or were there any other factors that you should call out?

Bill W. Wheat

That was by far the largest portion of it, and it's simply a matter of the significant profitability we have year-to-date this year and last year at this point. We were not profitable on a year-to-date basis. So that's a huge swing.

Operator

Our next question comes from the line of Joshua Pollard with Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Typical seasonality in your orders and deliveries, you guys have the September year end so things can be a little bit funky for you. I'm ultimately trying to understand your net absorption rate in the quarter were about 2.2 per month. How much should we see that go down q-on-q as we move into your fourth quarter and then again into your first quarter for '13 based on typical seasonality?

Stacey H. Dwyer

Yes, Josh, we can pull that up, and I can get back with you and kind of see what we've done historically. You're absolutely right though our seasonal trend is that the March quarter and the June quarter are usually pretty similar within a few basis points, then we'd see our sales trend down into the September quarter, down a little bit more into December and then start back up in the spring selling season into the March quarter. And I'll follow-up with you in terms of kind of historically what percentage we see.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay. In replacement of that question, can I ask what your year-on-year growth through July is? You talked about it being still robust, but I'd love to get a little bit more clarity and understand whether or not you guys expect your year-on-year order growth to begin to slow in the back half of the year.

Stacey H. Dwyer

Well, in terms of the year-on-year order growth, we haven't actually seen the end of July yet, so we'd prefer not to comment. But while we would expect the absolute orders to go down, we'll see what happens with the year-over-year order growth. Because even with a decline in orders, it could still hang in there very strongly.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay, great. And then if could ask one additional one. The orders in the north were up only 2%. Can you just dig into each of the states in that market and just give us a view of what's going on? It seems like the housing market is improving a lot, but this north and northeast seems to not be doing as well.

Donald J. Tomnitz

Well clearly, our position in the north is small, and frankly, if you take a look at the markets in our north region, they're small and they continue to be weak. And so as a result, it's an insignificant number really, but those markets have been hit a lot harder, and they are slow to recover. And largely if you take a look at some of them have high unemployment still and their state economies are weak.

Operator

Our next question comes from the line of Jade Rahmani with KBW.

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

I wanted to ask also about the mortgage environment. You indicated about 84% of the mortgage the originations were from D.R. Horton homebuyers. What percent historically have you originated from non-D.R. Horton homebuyers?

Stacey H. Dwyer

There has been a pretty good range on that, Jade, and a lot of it has to do with the amount of refinance that's going on in any individual quarter. We've probably ranged between maybe 5% to 20% would be outside business. One of the things that we do like to focus on though is increasing that non-captive business even beyond the refi business because that helps us leverage the overhead structure in those markets. So that is one of the focus points for the mortgage company is to continue to look at the outside business.

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then just a follow up on that. The gain on sale margins are pretty elevated right now given the refi boom we're seeing, as well as the HARP 2.0 program. Are you seeing -- presumably, you're seeing a benefit from that. Can you just comment on the sustainability of the margins you showed this quarter?

Donald J. Tomnitz

Yes. Clearly, the improved gain on sale as part of the increase in margins this quarter in financial services with a 40% operating margin. That's at the high end of our historical range and clearly higher than where we have been more recently. I would say a more typical operating margin over the long term would be more in the 30% range -- 30% to 35% perhaps so 40% was a bit higher than usual.

Operator

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

Nishu Sood - Deutsche Bank AG, Research Division

Wanted to ask about your debt offering. You folks have been reluctant to add expenses, interest expenses in the past, so I was a little bit surprised to see the debt deal, especially considering the amount of cash you guys have on hand. You got obviously plenty of cash, solid cash position. So I just wanted to get your thoughts on that. Does your -- overcome -- reluctance to add this interest expense, so that looks that you're going to, kind of, be stepping on the accelerator in terms of growth. Do you expect that to put to work sooner rather than later, is that -- what was behind the thinking of that deal?

Donald J. Tomnitz

I think it was clearly an opportunistic approach to the debt market at the time. Certainly, the coupon was extraordinarily low. Are we going to step on the accelerator? We are moderating the accelerator. One of our focuses still at this company is to underwrite land and lot deals, specifically the ones we have to cash out and our underwriting guidelines are pretty specific. We desire right now to get our capital back within 24 months. We do have some deals we are proving that are greater than 24 months, but we're very focused on not overextending our land and lot position to an excessive number of years to get our capital back. So we are -- just to be clear, we are optimistic about the housing market today, but we're also realizing that the U.S. economy is still weak, and so I wouldn't say we're stepping on any accelerator. We're just adjusting to each market and trying to take profitable market share from our competitors.

Bill W. Wheat

And then you are right that we had been reluctant to add interest expense to the company. And I think this reflects that we have more confidence in our ability to generate profits and cover that incremental interest expense than we may have had in the last couple of years.

Nishu Sood - Deutsche Bank AG, Research Division

Got it. Great. And second question on your orders. Your year-over-year order performance relative to the group has lagged the past say 4 quarters or so by about 10 or 15 percentage points. I just wanted to get your thoughts on that. Would we expect to see some closing of that gap going forward?

Donald J. Tomnitz

Well, as one of my favorite division presidents, Todd Horton always says, no good deed shall go unpunished. Clearly, we outperformed everyone during the downturn and so obviously, we have a much higher comp as we go through each quarter relative to our peers who performed much more poorly than we during the downturn. So as a result, we are continuing to focus on growing the company, but again, we're focusing on growing the company in a profitable manner.

Bill W. Wheat

We began growing our sales sooner, which got us to profitability sooner. Now we have much more substantial profits and we plan on growing on that. And we expect substantial sales increases in the future. We're focused on our sales.

Operator

Our next question comes from the line of Alex Barron with Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I wanted to understand I guess now obviously, the recovery seems more evident. How you guys are thinking about your land opportunities? I know you were one of the first to be up there buying finished lots 3 years ago, and it seems like you guys were picking up even a lot of what I would consider pretty small positions. So I'm kind of trying to figure out are you still focused on that even though prices are going up? And are you just paying more or are you finding undeveloped or partially developed land deals within those better markets? Or are you moving further out to find finished lot deals maybe in the so-called B and C markets?

Donald J. Tomnitz

Clearly our balance sheet is extraordinarily strong, so we're in a position to capitalize on any opportunities that we see on the land and lot side. Clearly, land prices in certain markets have moved up more dramatically than we think they should have. As a result, we're being more conservative in those particular markets. But we are putting our balance sheet to work on good deals in good markets with good returns. And the great thing about this company is we pretty much have maintained our original footprint during this downturn. And as opposed, like a number of our competitors having to focus on just a handful of markets to generate their growth, we've got a huge footprint and so we can selectively invest in each one of those markets or selective markets such that we don't have to take the risk that our other competitors do. And we can focus on growth and risk in the markets that we think are the best for us at that particular time without pushing the window too hard in any one market. We clearly are focused on one thing. We're not going to take the hook at this early stage in the housing recovery with the weak macroeconomic scenario that we see. And bet the balance sheet of this company that we've cleaned up so nicely and it's the strongest it's ever been just because of the fact that there are a lot of people out there thinking that land prices are -- need to be a lot higher than what they deserve to be.

Alex Barrón - Housing Research Center, LLC

And are you able to also push back on labor and materials or are you finding that the labor is -- it is what it is and you're having to pay up more for that?

Donald J. Tomnitz

Well, first of all, we have a lot of partners who we've been doing business with for a number of years. We just completed our every 2-year Purchasing Managers meeting in Las Vegas with our vendors and our manufacturers. And so as a result, we set the expectations for them where our volume is going. Clearly, we're a big portion of a lot of their business, and as a result, we continue to work together to keep our prices and our cost moderated. And we expect them to cover their overhead with D.R. Horton business and make their profit off of our competitors.

Operator

Our next question comes from Stephen East with ISI Group.

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

Don, if I hear you as you talk, it sounds like you're focusing more on volume as we move through, call it the next 4, 5 quarters versus pricing. How would you characterize how you prefer to grow between now and the end of '13?

Donald J. Tomnitz

Clearly, we've been the #1 builder unit-wise for 10 consecutive years. And all the while, I think clearly out earning most of our competitors, a few handful have done slightly better than we, but not significantly. And our goal on a go-forward basis is to continue to be the largest builder in the U.S., but most importantly to continue to focus on profitability. As Horton has said many times, it's easy to make money in this business. It's harder to keep it. And as a result, what we're trying to focus on and we are focused very hard on is profitability. But we're going to win profitability with volume, but what clearly our division presidents know one thing. They're not to take a backseat to any builder in any market because we have the best cost and the best pricing and best balance sheet of anybody in the industry. So you can add all that up and divide it up and see what I really said.

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

That's going to be a chore on that one. Okay. And then just 2 other sort of distinct questions. One, your split between fixed and variable on your G&A expense. And then you've talked a lot about some areas, land is just too expensive and that type of thing. If you look region by region, where are you primarily trying to put your money to work?

Donald J. Tomnitz

Well, I don't mean to be rude, Steve, but I just stopped giving the Bobby toll market grade by markets because frankly, we have some preeminent positions in a lot of our markets and I just don't want to be telling our competition where we're doing better.

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

I appreciate that. Can you do it in a more generalized area, not Dallas or Houston, but southwest versus east or something like that?

Stacey H. Dwyer

Steven, if you look at our land position in the regions that are improving most in terms of the lots that I have under control, the 2 standouts for us still continue to be the southeast and the south central region. Those are where we're finding more opportunities. And those have been consistently where we found more opportunities.

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

Okay, all right. And then on the SG&A?

Bill W. Wheat

Yes. In terms of the variable portion of our SG&A, when we are looking at revenue increasing sequentially, typically, our variable SG&A will equate to between 3% and 5% of the increase in revenues. So if revenues increased by $100 million, then we would expect the SG&A to -- the variable portion to increase between $3 million and $5 million. This quarter, the sequential increase from Q2 to Q3 was 5% of our sequential revenue increase.

Operator

Our next question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JP Morgan Chase & Co, Research Division

Just wanted to maybe get better clarity around the question I had before in terms of spec, but particularly as it relates to your comments around gross margins. You said that you expect gross margins, I believe, to improve in 2013 and in part due to more build-to-order versus spec. But I thought DT, you said that you expect spec next year to be roughly similar to this year. Was I mishearing or misunderstanding those comments?

Donald J. Tomnitz

No, you're not. And frankly, our spec level, as I said earlier, has run pretty consistently year after year after year, and we run somewhere between 50% and 60%. We may get into the 62% or 63% level at the right time of the year, and we dropped down to the mid-40s at other times of the year when we get closer to our third and fourth quarters. So as a result, our game plan has always been in this company, we know how to build specs, we know how to make money off specs, and we believe it's really a keystone of our business. So as a result on a go forward basis, notwithstanding the fact that we have more and more build jobs, we are also continuing to offer the same level of specs at the specific quarters in the year where it makes sense. We increase and decrease dependent upon the quarter of the year.

Stacey H. Dwyer

I think the other thing that maybe a little bit confusing is when we were talking about the ability to turn the backlog more quickly and some of the drag on the margin we were talking about completed specs. Completed specs have come down year-over-year from about 2,500, I believe, last year to about 2,100 this year. And as a percentage of our inventory, that's even a greater drop because our overall inventory has been growing. So that's another factor that we look at just in addition to our overall spec percentage.

Michael Rehaut - JP Morgan Chase & Co, Research Division

Okay. So then the completed specs is really one of the factors to drive gross margin improvement next year? Would another factor also be, you had mentioned over time, you're trying to migrate back from a 54% first-time buyer exposure more to typically 35% to 40%. And given comments around expanding the move-up product offering, would that also -- to the extent that you have a higher exposure in move-up next year, would that also benefit the gross margins?

Donald J. Tomnitz

Well clearly the bigger percentage of our backlog that's move-up should have a higher margin than the spec margin. And we should be rewarded for that simply because of the fact that we're building a home for a particular person as opposed to having -- building a production home which takes slightly longer. So we should get a higher return on a build job.

Bill W. Wheat

Right now, we are seeing margin improvement in every component of our business. And we think we have a good trend going. We're going to work on continuing to improve that in every component of our business.

Michael Rehaut - JP Morgan Chase & Co, Research Division

So maybe just to tie it all together, in terms of gross margins for next year, what would be the biggest drivers of expansion if you were to think across, let's say, 3 categories of less incentives of better pricing, mix shift towards move-up and less completed specs. So can you give us a sense of maybe the order of the drivers there?

Donald J. Tomnitz

Well clearly, I think that the more build jobs we have, that's going to drive our margins, the best of those 3 categories. The completed specs basically what we're talking about is that we have fewer aged completed specs, specs that have been completed for a period of 6 months or less. So to the extent that, that makes up a smaller percent of our backlog, that would be really the #2 driver. We have focused for years on making sure our specs have been completed for a period of greater than 6 months are moved and sold as quickly as possible.

Operator

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

Joel Locker - FBN Securities, Inc., Research Division

Just on your ASP, do you still expect that to -- I mean, it's been trending -- the closing has been trending higher than the backlog. Do you think that will continue?

Bill W. Wheat

The trend has been up. We hope it continues, but that's a week-to-week, month-to-month thing, but clearly, the trend has been up pretty consistently the last several quarters.

Donald J. Tomnitz

And I'd say 2 factors are driving that. One is how many build jobs we have, build-to-order houses we have, move-up homes we have and also frankly our pricing power. And right now, the pricing power is small, but is there, so I think that's one of the things clearly contributing to our increase on our ASP.

Joel Locker - FBN Securities, Inc., Research Division

Right. And you mentioned your compensation expense in third quarter being higher than a year ago. Can you quantify that on what it was in the third quarter 2012 and third quarter 2011?

Bill W. Wheat

We'd have to get back to you on the specific numbers on that. But that is the -- on the year-over-year change, that is the largest component of the year-over-year increase and directly related to the profitability of the company and the change in share price.

Stacey H. Dwyer

And just to be clear, that sales commissions, it's bonuses for the superintendents, it's division level comp, it's region comp and its corporate comp, all of those have some component that's either tied to volume, revenue or profitability and stock price.

Operator

Our next question comes from the line of Mike Rybak with Ivory Capital.

Michael Rybak

First question. Can you comment on the order growth progression for the quarter?

Stacey H. Dwyer

Mike, we typically don't comment about the intra-quarter trends, but the results that we posted where June was a little bit higher than our March quarter. Typically, March and June are pretty close together, but usually only in about 1/3 of the situation is June higher than March, so we would view this as a very positive sales trend.

Donald J. Tomnitz

And we're continuing that into July as we said.

Michael Rybak

Okay, okay. And Don, I think a couple of quarters ago, I think on the Q1 call, you mentioned that your personal goal is 5 years out coming close to 50,000 units. I mean, is that still kind of a realistic goal? And is there -- what sort of environment would we need to see for you to reach that before the 5-year mark?

Donald J. Tomnitz

I think when we went back and did the math, that's probably -- that's assuming about 20% to 25% growth each year for 4 or 5 years. And to answer your question directly, I would be disappointed in 5 years if we weren't closing over 50,000 units.

Operator

Our next question comes from the line of Mike Widner with Stifel, Nicolaus.

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

You had mentioned -- not really paying too much attention to what your peers do and mostly focusing on running the business for yourselves, which you've done very well. But I did want to ask you about what you're seeing out there particularly amongst some of the private builders. And really I guess the question is that there's been a widespread perception that those guys have been paralyzed and to some degree that they're -- a lot of them are gone forever and not coming back. And as you indicated, you guys took a lot of market share over the past couple of years as you were in a better position and reacted more quickly. With that said, the last couple of quarters have been exceptionally strong for the public builders, and there's a lot of market share stealing going on by other folks. I'm wondering if you're seeing any response in the private guys in terms of land competition for new deals or new communities opening up or anything along those lines? And how you'd expect that to play out going forward especially given that you've been around this business a few years and you've probably seen a cycle or 2 in your day.

Donald J. Tomnitz

I have seen a couple of cycles in my day, yes. And to your point about peers, we do focus on our competitors out there because frankly, that's a daily focus of ours. I would say to you on the -- as D.R. and I travel around the markets, one of the things that we don't see a lot of is activity in the small and medium-size builders, and that's directly a function of the unwillingness of the banks to lend to them. I think as the market continues to improve, obviously, the banks will begin to lend to them. But clearly, most of that lending will be done for the vertical construction and not the land and lots. So as long as the banks continue not to lend to the small and medium-sized builder on land and lots or independent developers to sell to individual builders -- small and medium-sized builders, I think that production homebuilders, in particular D.R. Horton will be in a preeminent position. And a lot of the developers over the last 4 or 5 years who did concentrate on developing lots and selling them to the small and medium-sized builders have learned a valuable lesson, and that is they need to deal with well-capitalized builders, so we're finding a number of the developers who focused on that portion of the market as they try to get back in the market and some of them are getting back in the market. They're definitely focused on dealer with well-capitalized production builders like Horton.

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

And so I guess how does this differ from some of the prior cycles. In that sense? I mean, obviously, this has been a much deeper cycle. But certainly, if we look back to the last one and coming out of this S&L crisis, most of the private guys did come back, and it's very mixed I think by geography as we look around and talk to small builders. But I mean, there's definitely been a tick-up in activity at least in some of the local areas that we look at and just wondering on your sense if this is varied by area, is this varied by the local relationships that the guys have with local backs and sitting on the local PTA and all that sort of stuff. I mean how did it play out last time? How did it play out back in the 80s? And again, any parallels or differences you're seeing today?

Donald J. Tomnitz

I think the key today is that the banks are -- obviously, they've gone through a very difficult time period themselves. And as I read, they're still not willing to lend to very many people, including well-capitalized and strong balance sheet companies like D.R. Horton. So clearly, they're not in the game to lend to the small and medium-sized builders. I think where the builders, small and medium-sized builders clearly have an advantage is in the less capital intensive markets. Clearly, Texas is a less capital intensive market. Places like Louisiana, even New Mexico and Arizona. But you get into places like California and Florida and particularly in the northeast, the average lot price is extraordinarily high, and so as a result, it cost -- it's a high risk and a high loan amount for a builder to get a loan from a bank and that takes a lot of equity on many occasions for those small and medium-sized builders on those capital intensive markets to even be in the market.

Stacey H. Dwyer

And to answer your question from a slightly different angle, I think if you look back to the early 80s, even the public builders were dependent on a significant level of bank debt. So we were still talking to the same sources of capital for growth during that time period. Now when you look at the balance sheets, we're using capital markets to pay for it. So it's a different source of lending for us that comes with fewer covenants and a defined timeframe that can't be taken back.

Michael R. Widner - Stifel, Nicolaus & Co., Inc., Research Division

So just -- I mean, one last point on that. I mean, the early 90s did have some parallels and that we were coming out the S&L crisis. I mean, certainly particularly with regard to mortgage lending or anything residential, it's pretty horrific experience for most banks and there were certainly -- I mean, there's a lot more bank failures actually last time around than this time around. So again just drawing the parallel back to -- on your experience from the last cycle, I mean, does it feel different, worse this time for the banks? Or do you think you have the same amount of kind of running room to again take advantage of their being paralyzed or again any historical comparison I guess would just be helpful.

Donald J. Tomnitz

Just from a personal standpoint, I think the banks today are in a preeminent position. They have the U.S. taxpayers backing, so as a result, they're stronger than they've ever been, and that's different from the last time because in the 80s and the 90s, clearly, the bank failure rate and the savings and loan rate was extraordinarily high so there were very few players in the market to even lend. But today, all of our banks are, I think, extraordinarily well-capitalized. I think what they're waiting for is clearly, some indication that when they make a loan that they're not going to be underwater on the loan 3 months later or 6 months later, because asset values have depreciated. So I think from their perspective and being an ex-commercial banker, I think it's tough to make a loan today just simply from the perspective that your loan-to-value ratio could change overnight. So I think there needs to be -- as it relates to the housing industry, I think there needs to be some small, but rather consistent increasing in valuations on houses and land and lots such that the banks feel comfortable that they're not going to be taking a write-down after they made the loan 3 months later.

Operator

There are no further questions at this time. I'd like to hand the floor back over to Mr. Tomnitz for closing comments.

Donald J. Tomnitz

Thank you. Thank you for joining us on our Q3 conference call. Obviously, we're very proud of what our company has accomplished and most importantly, we're proud of what our people have accomplished. It seems like that people key in on our conference calls to try to determine the level of confidence that we have in the homebuilding industry going forward. And clearly, you should have concluded from this conference call that we feel very good about the U.S. housing market. We feel very strong about our position in the U.S. housing market and that's all on the face of a rather weak macroeconomic environment. We're confident about our future, we're confident about our abilities to continue to capture market share. We're confident about continuing to be able to expand our market share and our profits and our profit margins. So thank you. We'll see you after the fourth quarter.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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