DR Horton Inc Q2 2026 Earnings Call Transcript

Note: This is a preliminary transcript and may contain inaccuracies. It will be updated with a final, fully-reviewed version soon.

DR Horton Inc (NYSE: DHI) Q2 2026 Earnings Call dated Apr. 21, 2026

Presentation

Operator

Sa. Sam sa. Sa. Sam. Good morning and welcome to the second quarter 2026 earnings conference call for Deorre Horton, America’ Builder. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star0 on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to Jessica Hanson, Senior Vice President of communications for Dr.

Horton.

Jessica Hanson — Senior Vice President of communications

Thank you Paul and good morning. Welcome to our call to discuss our financial results for the second quarter of fiscal 2026. Before we get started, today’s call includes forward looking statements as defined by the Private Securities Litigation Reform act of 1995. Although Dr. 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 Dr.

Horton on the date of this conference call and Dr. Horton does not undertake any obligation to publicly update or revise any forward looking statement. Additional information about factors that could lead to material changes in performance is contained in Dr. Horton’s annual report on Form 10K and its most recent quarterly report on Form 10Q, both of which are filed with the securities and Exchange Commission. This morning’s earnings release and our supplemental data presentation can be found on our website@investor.deorhorton.com, and we plan to file our 10Q later this week after this call.

We will also post our updated investor presentation to our Investor Relations site on the Presentation section under News and Events for your reference. Now I will turn the call over to Paul Romanowski, our President and CEO.

Paul Romanowski — President and CEO

Thank you Jessica and good morning. I’m pleased to also be joined on this call by Mike Murray, our Chief Operating Officer and Bill Wheat, our Chief financial officer. The Dr. Horton team delivered solid second quarter results with consolidated pre tax income of $867 million on $7.6 billion of revenues and a pretax profit margin of 11.5%. New home demand remains impacted by affordability constraints and cautious consumer sentiment. However, our tenured teams continue to respond to current market conditions with discipline.

During the quarter we delivered a consolidated pretax profit margin above the high end of our guidance range, generated revenues within our expected range and increased net sales orders by 11% compared to the prior year quarter. At the same time, we reduced our unsold completed homes by 35% from a year ago, reflecting our focus on balancing sales, pace, pricing and incentives to drive incremental sales while maximizing returns. We continue to focus on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders.

Over the past 12 months we generated $3.7 billion of cash from operations and returned $4 billion to shareholders through repurchases and dividends. For the trailing 12 months ended March 31, our home building pre tax return on inventory was 17.6% while our consolidated returns on equity and assets were 13.2% and 8.9%. Our return on assets ranks in the top 20% of all S&P 500 companies for the past three, five and 10 year periods, demonstrating that our disciplined returns focused operating model delivers sustainable results and positions us well for continued value creation.

Our sales incentives increased during the second quarter and we expect incentives to remain elevated for the rest of the year with a level dependent on demand, mortgage interest rates and other market conditions. We work every day to leverage our industry leading platform, unmatched scale, efficient operations and experienced teams to bring home ownership opportunities at affordable price points to more Americans. 65% of our mortgage companies closings this quarter were to first time homebuyers.

We will continue to tailor our product offerings, sales incentives and inventory levels based on demand in each of our markets to maximize returns. Mike

Mike Murray — Chief Operating Officer

Earnings for the second quarter of fiscal 2026 were $2.24 per diluted share compared to $2.58 per share in the prior year quarter. Net income for the quarter was $648 million on consolidated revenues of $7.6 billion. Home sales revenues in the second quarter totaled $7 billion on 19,486 homes closed compared to $7.2 billion on 19,276 homes closed in the prior year quarter. Our average closing price was $361,600, down 1% sequentially and down 3% year over year. Our average sales price on homes closed is below the average price of new homes in the United states by approximately $160,000 or about 30%, reflecting our focus on affordability.

In addition, the median sales price of our homes is approximately $70,000 lower than the median price of an existing home bill.

Bill Wheat — Chief Financial Officer

Net sales orders increased 11% year over year in the second quarter to 24,992 homes, while total order value increased 10% to $9.2 billion in line with our business plan and expectations. Our cancellation rate for the quarter was 16% consistent with the prior year period and down from 18% sequentially. The average number of active selling communities increased 4% sequentially and 11% year over year. The average price of net sales orders was $366,300, up 1% sequentially and down 2% compared to the prior year quarter.

Jessica

Jessica Hanson — Senior Vice President of communications

Our gross profit margin on home sales revenues in the second quarter was 20.1% which included a 40 basis point benefit from a favorable litigation outcome and lower than normal warranty costs. Assuming normalized warranty and litigation cost, our home sales gross margin would have been 19.7% in the second quarter, slightly higher than our guidance range on a per square foot basis. Sequentially, home sales revenues and stick and brick costs were both down 2% while lot costs were essentially flat year over year.

Home sales revenue and stick and brick costs were both down 4% per square foot while lot costs were up 4%. We currently expect our home sales gross margin to be 19.7% or slightly higher in the third quarter as we expect to realize additional construction cost savings on homes closed incentive levels and gross margin for the remainder of the year will continue to be dependent on demand, mortgage rates and broader market conditions. Bill

Bill Wheat — Chief Financial Officer

Our homebuilding SGA expenses in the second quarter increased 2% compared to last year and SGA as a percentage of revenues was 9.2% up from 8.9% in the prior year quarter the year over year increase on our SGNA expense ratio was primarily driven by lower home closings revenue reflecting the decline in our average sales price. We continue to manage our platform with discipline and and remain focused on gaining market share efficiently while driving operating leverage over time. Paul

Paul Romanowski — President and CEO

We started 27,500 homes in the second quarter and we ended the quarter with 38,200 homes in inventory of which 22,900 were unsold and 5,500 were completed and unsold. Our completed unsold homes are down 25% from December and 35% from a year ago with both unsold homes as a percentage of total inventory and completed unsold inventory at their lowest levels since fiscal 2023. For homes closed in the second quarter, our median cycle time from home start to home close improved by almost a month year over year.

Our improved cycle times enable us to hold less inventory and turn homes more efficiently. We expect starts in the third quarter to be lower than the second quarter and we will continue to manage our inventory levels and starts pace based on market conditions. Mike

Mike Murray — Chief Operating Officer

Our home building lot position at March 31st consisted of approximately 575,000 lots of which 23% were owned and 77% were controlled due purchase contracts. We are actively managing our investments in lots, land and development based on current market conditions. We remain focused on our relationships with land developers across the country and to allow us to build more homes on lots developed by others. This approach enhances our capital efficiency, returns and operational flexibility. In the second quarter, 67% of the homes we closed were on lots developed by either four star or third parties, up from 64% in the prior year.

Quarter during the second quarter, our home building investments in lots, land and development totaled $2.1 billion, including $1.5 billion for finished lots, $500 million for land development and $120 million for land acquisition. Paul

Paul Romanowski — President and CEO

In the second quarter our rental operations generated $12 million of pre tax income on $212 million of revenues from the sale of 566 single family rental homes and 216 multifamily rental units. At March 31, our rental property inventory totaled $3 billion, including $2.7 billion of multifamily rental properties and $347 million of single family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations and we currently expect our rental inventory to remain around $3 billion.

Turning to our financial services operations, pre tax income for the second quarter was $52 million on $193 million of revenues, resulting in a pre tax Profit margin of 26.8%. Mike

Mike Murray — Chief Operating Officer

Forestar, our majority owned residential lot development company, reported second quarter revenues of $374 million on 2,938 lots sold with pre tax income of $44 million. At March 31, Forestar’s owned and controlled lot positions totaled 94,000 lots. 65% of Forestar’s owned lots are under contract with or subject to a right of first offer to Dr. Horton. During the second quarter we purchased $280 million of finished lots from Forestar. Forestar’s strong separately capitalized balance sheet, national operating platform and lot supply position them well to provide essential finished lots to the home building industry and to aggregate significant market share over the next several years.

Bill

Bill Wheat — Chief Financial Officer

Our capital allocation strategy remains disciplined and balanced, supporting an operating platform that delivers attractive returns and substantial operating cash flows. We maintain a strong balance sheet with low leverage and healthy liquidity, providing significant financial flexibility to adapt to changing market conditions and opportunities. During the first six months of the year, homebuilding cash provided by operations totaled $619 million and consolidated cash provided by operations was $442 million.

During the second quarter we repurchased 6 million shares of common stock for $904 million reducing our outstanding share count by 8% compared to a year ago. We also paid cash dividends of 45 cents per share totaling $130 million, and our board has declared a quarterly dividend at the same level to be paid in May. At quarter end, our stockholders equity was $23.6 billion, down 3% from a year ago, while book value per share increased 5% from a year ago to $82.91. At March 31, we had $6 billion of consolidated liquidity, including $1.9 billion of cash and $4.1 billion of available capacity on our credit facility facilities.

Total debt at quarter end was $6.6 billion, with $600 million of homebuilding senior notes maturing over the next 12 months. Our consolidated leverage in March 31 was 21.7% and we continue to target leverage of around 20% over the long term. Jessica

Jessica Hanson — Senior Vice President of communications

Looking ahead to the third quarter, we currently expect consolidated revenues to be in the range of 8.8 to 9.4 billion, with homes closed by our homebuilding operations to be in the range of 23,500 to 24,000 homes. We expect our home sales gross margin for the third quarter to be in the range of 19.7 to 20.2% and our consolidated pre tax margin to be between 12.2% and 12.7% for the full year of fiscal 2026. We now expect consolidated revenues of approximately 33.5 to $34.5 billion and homes closed by our homebuilding operations of 86,000 to 87,500 homes.

We continue to forecast an income tax rate for fiscal 2026 of approximately 24.5%, operating cash flow of at least $3 billion, common stock repurchases of approximately $2.5 billion and dividend payments of around $500 million. Paul

Paul Romanowski — President and CEO

In closing, our results and positioning reflect the strength of our experienced teams, industry leading market share, broad geographic footprint and focus on delivering quality homes at affordable price points. These are key components of our operating platform that support our ability to aggregate market share, generate substantial operating cash flows and consistently return capital to our shareholders. We recognize the current volatility and uncertainty in the broader economy and we will continue to adjust to market conditions with discipline as we focus on enhancing the long term value of Dr.

Horton. Finally, I want to thank the entire Dr. Horton family, our employees, land developers, trade partners, vendors and real estate agents for your continued hard work and commitment. We look forward to continuing to improve our operations and expand homeownership opportunities for more individuals and families throughout fiscal 2026. This concludes our prepared remarks. We will now host questions.

Question & Answers

Operator

Thank you. At this time, we’ll be conducting a question and answer session. In the interest of time, we ask that participants limit themselves to one question and one follow up on today’s call. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. The first question today is coming from Alan Ratner from Zelman. Alan, your line is live.

Alan Ratner

Hey guys, good morning. Really nice job in a tricky environment. So congratulations. First question, I’d love to drill in a little bit more on the gross margin outlook. It sounds like adjusting for the the various warranty and litigation charges, it sounds like you’re expecting pretty stable margins sequentially, which is very encouraging given what’s going on. I know you mentioned you have some tailwinds there from lower construction costs. I was just curious if you can kind of give a little more detail on what you’re seeing on that front lately, especially with the higher oil prices of late.

We’re starting to pick up some chatter about fuel surcharges from suppliers and trades. And I’m curious if you’re experiencing that and in general what your outlook there is maybe beyond the third quarter if oil remains near current levels.

Bill Wheat — Chief Financial Officer

Sure. As we’ve discussed in prior quarters, we focused throughout our operations on sitting down with our trades and working our costs down as we held our starts back in Q4 and Q1. I feel good about what has been accomplished there. It’s an ongoing effort, will continue to be ongoing, but we can now see in our construction cycle and our homes under construction construction, lower costs coming through. And so we’ve started to see the front end of that in the current quarter that we’re reporting.

And we can see a bit more of that coming through next quarter. And so we expect to see some incremental benefits in Q3 and Q4 with respect to, you know, recent inflation potential inflation from oil prices. That’s something we’ll be monitoring closely. Right now we have nothing tangible to report in terms of anticipated inflation from that. But if we were to see an extended period where oil prices stayed elevated for an extended period, then there could be some pressure. If it remains a relatively temporary period, we wouldn’t Expect too much impact.

Alan Ratner

Great, I appreciate that. Second question on the rental segment. I know it’s not necessarily an area of growth for you guys, but obviously a lot of noise with the outstanding Senate bill related to BFR. I see you did sell 500 plus homes in single family rental this quarter. Just curious if you could talk about the demand you’re seeing kind of up for going forward on BFR and whether you think this is going to kind of cause a bit of a pullback in activity in your rental segment beyond 26 if it does come to fruition.

Paul Romanowski — President and CEO

We still see interest out there, but there is uncertainty around the legislation and I think a little bit of a pause in terms of people waiting to see how that plays out specifically as it relates to the seven year potential sale requirements. Generally speaking, you know, we have underwritten our build for rent communities as for sale. So if need be as we go forward, we can move those if needed. We also have focused majority of our forward business on forward sales. In other words, we aren’t starting those unless we have a contract and firm commitments and so feel good about our positioning there.

Not overly reliant at all on having that business continue to be able to hit certainly our guide and feel good about our positioning in the space.

Alan Ratner

Appreciate it. Thanks a lot.

Operator

Thank you. The next question will be from John Lavallo from ubs. John, your line is live.

John Lavallo

Good morning guys. Thanks for taking my questions as well. The first one is, you know, how would you sort of characterize demand in March relative to normal seasonality? And the reason I ask is we’ve had certain checks that indicate normal seasonality sort of occurred each week through the first week of March and then sort of leveled off as the war started. Other checks have indicated they saw normal seasonality all the way through March, notwithstanding the war. And then I’m curious also what you’re seeing year to date in April from a seasonality standpoint,

Mike Murray — Chief Operating Officer

I would say the demand was good. We saw sales in line with normal seasonality, kind of as we expected and hoped throughout the month. And we’re pleased with our sales results through mid April at this point. But it’s only middle of the month at this point.

Jessica Hanson — Senior Vice President of communications

And our cancellation rate was stable throughout the entire quarter.

Mike Murray — Chief Operating Officer

Yeah, no change in that.

John Lavallo

Yes. No, that was encouraging. Okay. And then on the order ASP of 366,000, it seemed to stabilize a bit here in the second quarter. It was actually up, I think quarter over quarter for the first time since maybe 2Q24. I mean, was there any Notable mix impact to call out there. And do you think we sort of found a floor on order, ASP or close to it at this point?

Paul Romanowski — President and CEO

I don’t know that there was a notable mix for that impact. You know, our incentives do remain elevated as we had called out and you know, we’re not going to call a floor relative to, you know, the market and demand will depend on what we see through the remainder of the spring and into the summer selling season.

John Lavallo

Understood. Thank you guys.

Operator

Thank you. The next question will be from Stephen Kim from Evercore isi. Steven, your line is live.

Stephen Kim

Great. Thanks very much guys. And yes, strong results here in a tough market. Wanted to ask you about the incentive environment. You called for incentives remaining elevated through the remainder of the year. And I’m curious if you’ve seen any changes in trends worth calling out in terms of perhaps maybe an increase in the use of ARMS or temp buy downs. If you could just give us a sense for what you’re seeing in terms of recent trend or recent activity in terms of how your incentives are tracking.

Jessica Hanson — Senior Vice President of communications

Sure. On the ARM front, we ran about 10% of our closings, at least through our mortgage company this quarter were an ARM product. That’s down from 13% sequentially, but it is up from essentially zero a year ago. We are incentivizing. We’ve got products out there that are ARM incentives. So we are not surprised by that tick up. It’s been somewhat strategic. I don’t know that we expect it to grow materially from here. It could bounce around in that 10 to 15% range would be my guess today. And then in terms of just the buy down overall, we did have 90% of the buyers that utilized our mortgage company get some version of a permanent and or a temporary buy down this quarter which is up on our overall closings.

That’s roughly 73% of our closings had some form of a buy down.

Stephen Kim

And could you give us a sense for overall what incentives may in aggregate represent as a percentage of maybe the msrp, the initial home price and whether this has been whatever it is. I’m sure it’s obviously elevated. As you indicated, it sounds like there’s no expectation to sort of bring that down at least as far as you can see this year. And I’m wondering how would you respond to folks who are worried that this is becoming a new normal, that the the buyer has become conditioned to expect a very elevated level of incentives.

And do you still have the same confidence that you had, let’s say three years ago when we started getting into this mess that you’re going to be able to bring those incentives all the way back down to the level they historically were.

Paul Romanowski — President and CEO

Steve, the incentives as a percent of Revs is roughly 10% and as it speaks to that level of incentives relative to market rates have remained relatively stable. They’ve been somewhat range bound and we’ve stayed pretty consistent in the rates that we’re offering. Therefore that cost of those rates has stayed relatively stable in terms of the total incentive package. That being the most significant incentive that we are getting. I think we’re going to need to see rates moderate some before we see that breakup and, or an increase in consumer confidence and more buyers in the market that allow for a reduction in incentive and over time eventually, you know, some, some increase in base house pricing.

But you know, we, we incentivize and look at that on a community by community level. You know, we do have communities that we see a reduced incentive level. We haven’t seen that come in aggregate. When you look at our overall revenues and as we focus on selling earlier in the process, we see the opportunity to hold back on some of those incentives as well.

Stephen Kim

Okay, great, thanks.

Operator

Thank you. The next question will be from Ryan Gilbert from btig. Ryan, your line is live.

Ryan Gilbert

Hi, thanks. Good morning everyone. First question on selling what you just said on selling homes earlier in the process, it does look like based on the backlog data you’ve been able to sell more homes before they’ve been completed. Is that just a function of the drop in standing inventory or are you able to offer more incentives on homes under construction than you have been able to previously or have consumer preferences shifted away from completed spec?

Jessica Hanson — Senior Vice President of communications

With our cycle times where they are today, we’re able to sell earlier and still put them into the BFC if that’s the incentive that we’re needing to get them across the finish line. Whereas before our construction cycle times were elongated and we weren’t able to do that. But usually when we sell a home earlier, we actually see a gross margin lift versus selling a home later.

Ryan Gilbert

Okay, got it, thanks. And then second question on starts. Pretty big year over year pickup. Did you increase starts throughout the quarter? Did you need to make any adjustments as a result of the Iran conflict? It sounds like potentially not based on the third quarter guidance, but yes. Any color on the starts gains throughout the quarter and then if you think 3Q will also be down on a year over year basis in addition to sequentially

Mike Murray — Chief Operating Officer

On the starts for the quarter. We maintained our plan for the quarter throughout the quarter and we felt really good with the sales demand we saw. So the starts plan was was in line and continued. I think we’d be expect to be seeing starts down sequentially in Q3, but likely roughly flat with what we had last year somewhere in that range, obviously depending upon the sales environment at a community level.

Ryan Gilbert

All right, thanks very much.

Operator

Thank you. The next question will be from Sam Reid from Wells Fargo. Sam, your line is live.

Sam Reid

Thanks everyone. Just wanted to talk through the cycle time benefit you got in the quarter relative to last year. I know this came up a little bit on the prior question, but how much of the one month improvement was explicitly from lower construction cycle times versus shorter complete to close? And then can you talk to any sequential benefits you might have gotten from that lower complete to close in Q2 vs Q1?

Jessica Hanson — Senior Vice President of communications

Our complete to close was down about a week sequentially, which is good. We still have room that we can improve that further. But a week quarter over quarter is a good start.

Sam Reid

No, that’s awesome. Helpful to hear. And then I know your red tag sale, I believe that’s ongoing right now. Can you just remind us whether there are any timing differences between the sale this year versus last year and maybe any tweaks to incentives we should be mindful of on the red tag sale? I mean, I know you run it fairly regularly, but always trying to get a sense for any changes at the margins.

Mike Murray — Chief Operating Officer

We’ve been consistently doing a red tag sale normally around the start of our fiscal quarters and the incentive levels vary by community, by sub market. I wouldn’t say there’s anything different in the timing this year or anything really different in the incentive levels we’re looking at in the aggregate. We have a little less completed inventory today in today’s the current red tech sale than we did in the prior red tech sale.

Sam Reid

All helpful contacts, thanks so much.

Operator

Thank you. And the next question is coming from Matthew Booley from Barclays. Matthew, your line is live.

Matthew Booley

Hey, morning everyone. Thank you for taking the questions. So I wanted to first get a sense of what led the margins to be above your guidance and presumably with that continuing to how you’re thinking about Q3 here. So was it kind of a reflection of the 6% mortgage rate environment we had from earlier this year? I mean it sounded like lot costs at 4%, probably a little bit lower than what we’ve seen recently. Maybe more success on stick and brick than you had thought. Just sort of. How do you bucket all that out?

Thank you.

Paul Romanowski — President and CEO

I think it’s a combination of all those Things we’ve seen some reduction in stick and brick come through. That bill spoke to less reduction of the increase of lot price. So those somewhat offsetting. And then we saw a fairly strong quarter from demand perspective. And just under 25,000 homes sold in the quarter allowed us to hold incentives maybe a little more than we had anticipated. And that’s the result of our margin being at the high end or above our guide.

Matthew Booley

Got it. Okay, that’s perfect. And then secondly, I wanted to dig in back to that ARMS question. So I guess number one, was there any more sort of temporary buy downs on top of the arms or is that 10% you mentioned kind of the whole thing, but then more specifically I guess going from 0 to 10% or if it’s more with the temporary buy downs, is there a rule of thumb or how would that impact your home building gross margins relative to your financial services margins as well?

Mike Murray — Chief Operating Officer

I don’t think it had a really significant material impact on the company. I think the ARM product has been pretty slow on the uptake this time versus prior cycles. And people definitely prefer a 30 year fixed rate mortgage and it is up 10% from zero last year, but it’s down 3% from Q1. So it’s not having a significant impact truly on margins at the home builder or the financial services team at this point.

Matthew Booley

Got it. Thanks guys. Good luck.

Operator

Thank you. The next question will be from Anthony Petanari from Citi. Anthony, your line is live.

Anthony Petanari

Good morning. On stick and brick, you talked about trends in building products costs. I’m just wondering if you could talk a little bit more about the labor piece, what that is year over year and is there an opportunity to keep driving that down on a year over year basis and what you’re doing there?

Paul Romanowski — President and CEO

We are seeing consistent labor and plenty of labor in the market, hence our reduced cycle times. And we continue to see those the construction cycle times have slowed in terms of reduction just because we’re below our historical average pace of home construction. So with more labor means more competition. And so we’ve seen certainly a portion of those total stick and brick savings come to through labor as well as some mix of materials. That specific amount or percentage or split we don’t have, but expect to see with what we’re seeing in the market that we continue to see some stick and brick savings show up, especially into our third and our fourth quarter in our homes that we close.

Anthony Petanari

Okay, that’s helpful. And I’m wondering if you could give any more kind of regional color on market strength and particularly what you’re seeing in Texas and Florida this spring season?

Mike Murray — Chief Operating Officer

I think we’re seeing good demand in Texas. Consistent as well in Florida. The markets feel pretty good to us generally across the country. I would say that most of our markets are performing well in line with expectations. Perhaps a little bit of softness in a few of our markets that have kind of a traditionally heavy exposure to the software industry, that buyer’s sentiment may be off a bit. Other than that, just kind of a good start to spring. Pretty encouraged.

Trevor Allison

Okay, that’s helpful. I’ll turn it over.

Operator

Thank you. The next question will be from Trevor Allison from Wolf Research. Trevor, your line is live. Apologies. Look like we just lost Trevor. I’ll come back to him if he comes back in. The next question will be from Michael Reholt from J.P. Morgan. Michael, your line is live.

Michael Reholt

Great, thanks. Thanks everyone. Good morning. I wanted to circle back to comments you made earlier about demand trends in March and April and you kind of indicated that I believe March in line with seasonality. And you’re pleased so far with April. I was kind of curious if you could kind of go a little bit more into detail on that. Obviously the consumer sentiment data has come out a little shaky since the start of the Iran war. A lot of volatility, a lot of headlines. I’m just kind of curious what you’re seeing more on a bottoms up basis from your, from your home buyers and week to week if perhaps the month as a whole might have been kind of consistent with seasonality, but if you saw any more volatility on a week to week basis.

Jessica Hanson — Senior Vice President of communications

We don’t generally comment on intra quarter in terms of monthly trends. But to reiterate what Mike said, demand was good throughout the quarter and in line with our expectations. And normal seasonality. Normal seasonality would be that February into March and into April are really getting into the heart of the spring selling season and we didn’t see any meaningful impact or disruption to the business that we would tie to any global or gas related price increases. And I said earlier, but also our can rate was stable throughout the quarter, which is another positive.

Michael Reholt

Okay, I guess secondly you highlighted gross margins being stable going to the third quarter if you exclude the 40bp benefit. Also expecting to benefit from lower costs into the third quarter, perhaps if I heard it right, more than the second quarter as some of those benefits compound, let’s say. Or you feel the fuller impact with flat gross margin sequentially and you have better continued gains on the lower cost. Are there anything that’s offsetting that that otherwise you wouldn’t see a potentially slight sequential improvement.

And I’m thinking in particular, if perhaps there’s still kind of some movement around incentives or higher land costs or any factors that might offset the otherwise benefit from lower construction costs,

Bill Wheat — Chief Financial Officer

We do continue to expect our lot costs to incrementally be a bit higher. It was relatively flat this quarter sequentially, but year over year still up 4%. So that is a continuing headwind that our base case for this year was that we would see enough improvement in our stick and brick labor costs to offset that. And that’s what we’ve seen thus far. That’s kind of what we see as we look into Q3 right now. Obviously, incentive levels will depend on demand and mortgage rates and all the other factors that will impact our selling process.

So that remains to be seen what will happen on the incentive front. Great.

Michael Reholt

Thank

Bill Wheat — Chief Financial Officer

You.

Operator

Thank you. And the next question will be from Trevor Allison from Wolf Research. Trevor, your line is live.

Trevor Allison

Hi, good morning. Thank you for taking my questions. You mentioned earlier that your completed specs are down about 35% year over year, so made some real progress on working down inventory in past quarters. You’ve talked about industry inventory levels kind of still being extended here. Have you seen the industry overall also start to make some progress on working down inventory? And then was that a factor either industry wide or for you guys specifically in your 2Q gross margin coming in better than you anticipated?

Paul Romanowski — President and CEO

I think we have seen inventory levels reduce across the competitive environment. And I think similar to what we have done, a little more control on starts and that being dependent on the sales pace and demand. And we have absolutely watched that closely week to week and managing our starts in line with our housing demand that we see and our expectations as well. We move from quarter to quarter. So we feel good, very good about our inventory position and good about the starch level that we had as it related to our sales throughout the quarter.

Trevor Allison

Okay, very helpful. And then second question on your lot count down about 10% year over year. You got land prices which remain sticky. Demand’s still challenged. Is it your expectation that lot count kind of still continues to move lower sequentially here as maybe fewer deals just meet your underwriting standards in the current environment, or are you able to find enough deals here where you expect that lot count to kind of flatten out from where it’s at now? Thanks.

Mike Murray — Chief Operating Officer

I think we feel really good about the current lot position we have, and we’re, you know, probably as good as we’ve ever been in the company’s History of positioned with our land pipeline such that we’re able to kind of pass on deals that don’t make sense in today’s current incentive environment and being disciplined in our approach to the underwriting.

Jessica Hanson — Senior Vice President of communications

I think our development partners continue to work with us as well to adjust lot takedown schedules and so that’s probably a big driver of the sequential decline in our owned lot count as we still have an immense need for finished lots and appreciate those relationships and the ability to slow our takes in the projects where we need to.

Buck Horn

Thank you for all the color and good luck moving forward.

Operator

Thank you. The next question will be from Raf Jadracich from Bank of America. Raif, your line is live.

Raf Jadracich

Hi, good morning. Thanks for taking my questions. Just following up on the last comment. Can you talk about your exposure to land banking maybe as a percentage of the option mix and then your ability to actually slow down the pace of the lottie down?

Mike Murray — Chief Operating Officer

We have a mid single digit exposure to land bank lot bankers within our lot portfolio. So it’s not a significant part of our land strategy at this point. Most of our lot position is held by true third party developers that are putting lots on the ground for us or Forestar and we’ve been able to work with those folks in terms of adjusting, as Jessica said, take down schedules, timing of development phases to meet the market in line. That makes sense for the market. We believe our strategy of working with third party developers provides us a lot of operational flexibility in addition to capital efficiency and utilizing the benefit of some very knowledgeable and expert and seasoned experts in the development world.

Raf Jadracich

That’s really helpful. And then I know it can be difficult to predict at times, but just can you help us at all with how we should think about the community count growth in the second half of the year and if there’s any sort of cadence that we should be considering,

Jessica Hanson — Senior Vice President of communications

We don’t. I always start with this but we don’t guide the community count for a reason. It’s a really hard one because it is so dependent on what’s happening with our sales pace community by community. But it has had stayed on a year over year basis up a double digit, low double digit percentage. We were up 11% year over year and 4% sequentially. We do continue to expect that to moderate at some point. I think the biggest positive this quarter, irrespective of community count, is that our sales were up 11% in line with our community count increase.

So we didn’t see any decline on a year over year basis in terms of absorption so another really positive sign about the second quarter and the demand environment.

Bill Wheat — Chief Financial Officer

We expect it will moderate to that mid single digit. Exactly what that timing will be, whether it’s in the next few quarters or it’s next year sometime. That’s the part that’s a little more difficult to predict.

Raf Jadracich

Great. Thank you.

Operator

Thank you. The next question will be from Buck Horn. From Raymond James. Buck, your line is live.

Buck Horn

Hey, thanks. Good morning, guys. Congrats. Apologies if I missed this earlier, but I was just wondering if you could clarify for me the changes to the top end of the revenue guidance for the year. Given the. I mean, the pretty resilient strength in net orders and the faster cycle times you’re seeing. I just wanted to be clear on what the messaging was on kind of taking down the top end of revenue guidance for the year.

Jessica Hanson — Senior Vice President of communications

We lowered our closings guide by 500 and then we also saw a lighter asp than we would have originally anticipated. And we’re not really assuming our aspect to increase in the back half of the year. And so it’s a combination of slightly lower closings at the high end and slightly lower average sales price.

Buck Horn

And those lower closings would be driven by what factor.

Jessica Hanson — Senior Vice President of communications

We were light on our closings guide in both Q1 and Q2. We didn’t achieve what we said we were going to do. We’re still very well positioned to deliver. In the heart of our original guide, we just felt like it was prudent to bring down the top end since the first half of the year we didn’t deliver exactly what we were expecting.

Buck Horn

Got it. Got it. Thanks for that. I appreciate it. And just secondly, I was just curious if you’re making any thoughts or changes around your land pipeline just due to what’s changing around gas prices. And just as consumers are having to drive longer distances for new home communities and the elevated cost of commuting does that. If we see an elevated energy price outlook longer term, do you start to reevaluate some of the locations where your communities are at in the pipeline?

Paul Romanowski — President and CEO

We would have to see a very extended period of elevated gas prices to want to be responsive to that. The time that it takes to bring these communities online and our positioning of those communities are where we’d like to see them. So we feel we feel good and comfortable about our community and our future community counts and locations. That said, we adjust as the market moves and if we see an adjustment in market based on distances, then we’ll adjust in kind. But nothing that we feel we need to be proactive.

About at this point in time.

Buck Horn

Got it. Appreciate it. Thanks, guys.

Operator

Thank you. The next question will be from Susan McLaury from Goldman Sachs. Susan, your line is live.

Susan McLaury

Thank you. Good morning, everyone. My first question is on the sga. Can you just talk a bit more on how we should think about the path from here, your ability to get some leverage in the second half as those closings continue to come through?

Bill Wheat — Chief Financial Officer

We do expect to see some leverage in Q3 and Q4 as our guide for closings is a step up. So we’ll see a higher revenue volume in Q3, Q4. Obviously, we want to be as efficient as we can there. The decline in our ASP over the last few quarters and then specifically this quarter, obviously is a little bit of a drag on the SGA ratio as well. But as we look forward, we do expect to see SGA as a percentage of revenue coming down from where we’ve been the last few quarters.

Susan McLaury

Okay, all right, that’s helpful. And then how should we think about your ability or your willingness to continue on the shareholder returns? Any thoughts there on potential upside or changes to the guide and how you’re thinking about balancing investments in growth relative to the dividend and the buyback? In this environment,

Bill Wheat — Chief Financial Officer

Our approach will remain consistent there. We’re focused on generating strong cash flows from operations and then basically utilizing 90 to 100% of that cash flow for distribution contributions to shareholders. We’ve been consistent with our dividend and inching that up each year. And then the remainder goes to share repurchases. We’re still guiding to approximately 2.5 billion of share repurchases this year. We’re ahead of pace through Q2. When we saw the pullback in the stock in the latter part of the March quarter, obviously we continued to purchase and leaned into it a bit.

So we really essentially accelerated a bit of our repurchases into Q2, but still right on track towards our 2.5 billion guide for the year.

Susan McLaury

All right, thank you. Good luck with the quarter.

Bill Wheat — Chief Financial Officer

Thanks, Sue.

Operator

Thank you. The next question will be from Jade Rahmani from abwk. Jade, your line is live.

Jade Rahmani

Thank you very much. Could you talk about what’s driving these warranty and litigation benefits which you’ve experienced for more than this quarter and if you expect further benefits going forward.

Bill Wheat — Chief Financial Officer

Yeah, Jade, the last three quarters, we’ve had various kind of one off events that occurred this quarter. We had a favorable outcome from a specific litigation case that had been previously reserved, and the results was better than what we had anticipated. When we booked the reserve. And so that was a positive benefit this quarter as well, as we did see our warranty costs step down a bit. And we’re seeing the benefits of that. We set our reserves based on really where our costs have been. So there was some benefit from that.

So this quarter we would attribute 40 basis points of benefit from those items that we do truly believe are one off. And so really our forward anticipation is that the net impact of litigation and warranty would continue to be around 40 to 50 basis points. Negative impact on margin each quarter. This quarter that impact was zero. We would expect normally it would be a negative impact of 40bps.

Jessica Hanson — Senior Vice President of communications

And as a reminder, our supplemental presentation out on our investor relations site does give that line item detail on the home sales gross margin slide. And so you can see quarter to quarter what that is. And if you go further back than the last three quarters, you’ll see we’re right in the heart of that 40 to 50 basis point typical impact.

Jade Rahmani

Thanks very much. And in terms of the share buybacks, you know, is there a multiple at which above book value you don’t think it makes sense? And where you would look to rather lean on the dividend as a way to efficiently return capital?

Bill Wheat — Chief Financial Officer

We look at all aspects of our distribution strategy and valuation of where the stock is is a component of that. However, we’re committed to continuing to distribute the substantial majority of our cash flow to our shareholders. We’ve typically kept the dividend at a more consistent level because any payment of dividends, you prefer that to continue to increase over the long term. And we are very reluctant to reduce dividend levels. And so the share repurchase would be the element that would be more likely to either toggle up or toggle down over time.

Jade Rahmani

Thank you.

Operator

Thank you. The next question will be from Mike Dahl from ORBC Capital Markets. Mike, your line is live.

Mike Dahl

Good morning. Thanks for taking my questions and nice results. I just wanted to ask a clarifying question on the incentives. I believe in the opening remarks you made a comment about incentives continue to increase in the quarter. But then a lot of your subsequent commentary, it sounded like it was actually a little more stable. So I just wanted to kind of confirm. Was that a comment that was sequential or year on year? And then I understand that on a forward basis the market conditions will dictate where you go with that.

But in terms of what’s embedded in the 3Q guide, is that for stable sequential incentives or a different level, good or bad?

Mike Murray — Chief Operating Officer

I think you heard that properly as stable incentive levels from Q2 to Q3. In Q2, about 61% of our homes closed were sold within the quarter. So they’re very reflective. The results were reflective of the market conditions we experienced. And that’s what we’re kind of projecting forward from an incentive level.

Mike Dahl

Okay, so the 10% in, the 10% you experienced in 2Q, was that also stable relative to 1Q?

Jessica Hanson — Senior Vice President of communications

It ticked up slightly, but it was essentially rounded to the same number.

Mike Dahl

Got it. Yeah. Yeah. Okay, that makes sense. I wanted to also follow up on the material cost dynamic. I appreciate that you guys have some forward visibility, given the way you. You negotiate with your. With your trades and labor. If we. We’ve now seen a slew of price increase announcements across a large basket of construction materials and building products. Understanding that, you know, it may take time for those to go through, it may fluctuate based on ultimately what’s happening on the ground today.

But from a timing standpoint, if we start seeing price increases go into the market this later this spring, when does that flow through? Is that a fiscal 27 closings dynamic for you at this point in the year? Are you pretty locked for 26 starts and closings?

Paul Romanowski — President and CEO

If we started to see those price increases truly come through, then, yes, that would be more of an impact on fiscal 2017. Certainly we’d see some, but I think probably offset imbalance, and we really haven’t seen that to date. So we’ll just see how that goes based on what occurs in the world.

Jessica Hanson — Senior Vice President of communications

Increases get announced a lot. That doesn’t mean we actually take them,

Ken Zenor

Of course. Okay, thank

Sam Reid

You.

Operator

Thank you. The next question will be from Ken Zenor from Seaport Research. Ken, your line is live.

Ken Zenor

Thank you. Good morning, everybody. Given your normal order seasonality, do you feel. Did your teams tell you that you guys gained share, or is that kind of just a demand environment?

Mike Murray — Chief Operating Officer

Hard for us to gauge what we’re doing on share versus the overall environment. You know, it felt pretty good. You know, anecdotally, I’d say maybe it’s a little bit of share, but I don’t know. We’ll find out when everybody else reports over

Jessica Hanson — Senior Vice President of communications

The next week and a half. I think you’ll have a pretty good idea.

Mike Murray — Chief Operating Officer

I mean,

Ken Zenor

Right? No, it’s very impressive. And then your lower land cost, I think you said it was up 4% year over year. Could you give us some context that. I think it was more in the mid to high single digits. And then can you talk to the benefit you believe you’re realizing from when you shut slowed down, starts to renegotiate Just trying to understand how those two factors are, you know, might play out going forward. Thank you.

Paul Romanowski — President and CEO

When you talk about the benefit of slowing starts, are you talking on the land side or on the labor side? Labor. Yeah. Yeah, I think that

Ken Zenor

It could be both. I mean, really just illuminate us if you would.

Paul Romanowski — President and CEO

Yeah. I think that what we have seen and expect to see as we go into the third and fourth quarter that the stick and brick savings between both materials and labor will offset any increase that we see on the land side. We have, you know, as we’ve gone through community by community, just like we do on the sales and our incentive level. This is a, is a regular discussion with our development partners and or landowners relative to the terms of any particular deal. And, you know, we’ve seen some savings on land deals, not widespread, but some land and lot reduction based on the reality of the environment and the pace at which we’re buying lots andor starting homes.

Jessica Hanson — Senior Vice President of communications

And Kim, so the first part of your question, we did see moderation in terms of that increase on a year over year basis. We were up 6% last quarter, 4% this quarter. Too early for us to say it’s going to continue to decline or stay right in that 4% range. But we have expected as we continue to move through our earlier or our more recently purchased land that that will moderate in terms of the year over year increase.

Buck Horn

Thank you.

Operator

Thank you. The next question will be from Jay McCandless from Citizens. Jay, your line is live.

Jay McCandless

Hey, good morning everyone. Jessica, I wanted to go back to a comment you made about a gross margin tailwind on homes that you guys sell earlier in the construction process. Is that some extra upgrades going in or is that just some cost attribution flowing through?

Paul Romanowski — President and CEO

Some of that comes from choice selling earlier in the process compared to a completed home or one that we may be more motivated to move off balance sheet and get a buyer in there. So when we sell early in the process and there’s a little more choice, whether that’s lot selection or some of the things that go in the homes, I think those all attribute to a slight advantage on gross margin at time of sale.

Mike Murray — Chief Operating Officer

Just to clarify that we would expect a slightly higher margin on homes sold earlier in the construction process than those that are sold when they’re complete, just to make sure we got the headwind tailwind on margin and cost of sales. And

Jessica Hanson — Senior Vice President of communications

We typically always talk to the point that once a home’s completed and unsold for a period of time, we do start to see the margin degrade, which is why we have such a focus on not letting our completed specs agency and how pleased we are with our completed spec reduction today.

Jay McCandless

Okay, that’s great. Thank you for that explanation. The second question I had, I guess along those lines, if you are able to sell a little bit earlier, I guess, how much were you able to raise prices in certain markets this quarter, or is it still kind of tricky to pull that off?

Paul Romanowski — President and CEO

It’s certainly tricky to measure with any consistency because that is a community by community balance. In some cases, it’s a reduction of incentive compared to a price increase. And trying to nail that down and put a number to it is just. Just not something that we have.

Jay McCandless

Okay, great. Thanks for taking my questions.

Operator

Thank you. The next question will come from Jonathan Bettenhausen from Truist Securities. Jonathan, your line is live.

Trevor Allison

Hey, guys, thanks for taking the question. I know it’s a smaller mix of sales, but it’s another good quarter for the North. That’s a fairly large region from a geographic perspective. So are there any metros specifically to call out that you’re seeing outsized growth or is it more just kind of broad across the region there?

Mike Murray — Chief Operating Officer

Pretty consistent across the region. It’s also reflective of investments we’ve made in that geography over the past several years that are now coming and bearing fruit. So we’re really pleased with the teams, how they’re performing across the north region and. And the contribution they’re making to the overall sales results as Texas and Florida are not quite the powerhouses they once were.

Trevor Allison

Yeah. Okay. And just to follow up on that, can you talk about the kind of investment thesis in the North?

Mike Murray — Chief Operating Officer

The investment thesis, it was markets we had not heavily penetrated. We saw opportunity to take national market share by expanding our presence in those markets. And we did it through a combination of greenfield organic growth as well as a few acquisitions.

Alan Ratner

Okay, got it. Thank you.

Operator

Thank you. The next question will be from Alex Riegel from Texas Capital. Alex, your line is live.

Mike Dahl

Thank you. Cancellation rates have remained fairly stable, but have the reasons for the cancellations changed at all?

Jessica Hanson — Senior Vice President of communications

No, we continue to see that the vast majority of our cancellations are due to the buyer ultimately not being able to qualify for the mortgage once they get into the full documentation process.

Michael Reholt

Thank you.

Operator

Thank you. And the next question will be from Alex Barron from Housing Research Center. Alex, your line is live.

Alex Barron

Thank you. Good morning. You know, I was recently in San Antonio and saw you guys had several communities priced in the high one hundreds, low two hundreds, and I was wondering if that’s just something you’re only doing in that market or it’s a new push you guys are doing across more markets to build more lower priced, affordable communities.

Paul Romanowski — President and CEO

Alex, we have focused on finding a more affordable product and doing it where we can in the markets that especially allow the smaller lot prices and allow for those smaller square footages. Not something we can do across all municipalities in the country. We still face a lot of minimum lot size requirements that put the cost of the lot out of range to achieve that and or minimum square footages. But where we can achieve. We have seen good success with that and certainly in Texas, allowing to get some of the lowest prices we can provide around the country.

Where you’re seeing in San Antonio, and we’re seeing those across the Texas markets and feel good about that positioning.

Alex Barron

Okay. And are you finding above average sales pace for that price point?

Paul Romanowski — President and CEO

We are. It certainly opens up home ownership to places where there is no other option in a lot of the markets and certainly not for a new home with a warranty and stability of neighborhood and community that we’re deliver. So it’s absolutely opening up homeownership across the markets and we see a higher pace because of that.

Alex Barron

All right, best of luck. Thank you.

Operator

Thank you. And that does conclude today’s Q and A session. I will now hand the call back to Paul Romanowski for closing remarks.

Paul Romanowski — President and CEO

Thank you, Paul. We appreciate everyone’s time on the call today and look forward to speaking with you again to share our third quarter results on Tuesday, July 21st. And congratulations to the entire Dr. Horton team on a solid second quarter. We appreciate everything that you do.

Operator

Thank you. This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.