Taylor Morrison Home Corp (NYSE: TMHC) Q4 2025 Earnings Call dated Feb. 11, 2026
Corporate Participants:
Mackenzie Aron — Vice President of Investor Relations
Sheryl Palmer — Chairman and Chief Executive Officer
Erik Heuser — Chief Corporate Operations Officer
Curt VanHyfte — Chief Financial Officer
Analysts:
Matthew Bouley — Analyst
Alan Ratner — Analyst
Paul Przybylski — Analyst
Michael Dahl — Analyst
Michael Rehaut — Analyst
Rafe Jadrosich — Analyst
Kenneth Zenner — Analyst
Alex Barron — Analyst
Presentation:
operator
Good morning and welcome to Taylor Morrison’s fourth quarter 2025 earnings webcast. Currently, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations. Please go ahead.
Mackenzie Aron — Vice President of Investor Relations
Thank you and good morning. We appreciate you joining us today. Before we begin, let me remind you that this call including the question and answer session, we will include forward looking statements. These statements are subject to the Safe Harbor Statement for forward looking information that you can review in our earnings release on the Investor Relations portion of our website@taylormorrison.com these statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to those factors identified in the release and in our filings with the SEC and we do not undertake any obligation to update our forward looking statements.
In addition, we will refer to certain non GAAP financial measures on the call which are reconciled to GAAP figures in the release where applicable. Now I will turn the call over to our Chairman and Chief Executive Officer Cheryl Palmer.
Sheryl Palmer — Chairman and Chief Executive Officer
Thank you Mackenzie and good morning everyone. Joining me is Kurt Van Hechte, our Chief Financial Officer and Eric Heiser, our Chief Corporate Operations Officer. I am pleased to share the results of our fourth quarter performance and look forward to sharing an update on our strategic priorities for 2026. Our fourth quarter results met or exceeded our expectations across nearly all key operational metrics.
Despite challenging market conditions, these results concluded a solid year of performance in 2025 during which we delivered nearly 13,000 homes at an adjusted home closings gross margin of 23% and generated 40 basis points of SG and a expense leverage on essentially flat home closings revenue. Coupled with 381 million of share repurchases, these results drove a 13% return on equity and 14% growth in our book value per share. With the majority of homebuilders having already reported year end results, it’s clear that Taylor Morrison’s 2025 performance stands apart among our peers. We delivered one of the highest home closings gross margin in the industry, were the only to achieve year over year SGA leverage and modestly increased our closings volume while the industry was generally flat to down which together drove more resilient bottom line earnings and returns in a year characterized by softer consumer confidence and heightened pricing competition and inventory levels.
We believe that these results reflect the effectiveness of our diversified operating model and broad consumer reach across our national footprint of well located communities. Given the market’s persistent affordability constraints which are felt most heavily among first time home buyers, our portfolio’s unique concentration on move up and resort lifestyle customers has helped us to navigate the market’s headwinds. We pride ourselves on developing thoughtfully designed communities, often with amenities in prime locations and offering a balanced mix of spec and to be built home offerings that meet the needs and aspirations of our customers. I believe this is perhaps Taylor Morrison’s greatest competitive advantage, the desire to deeply understand our consumers, respond to their feedback and deliver a home buying experience that is second to none.
It is this unrelenting focus on our customers that has recently earned us the reputation as America’s most trusted builder for the 11th consecutive year and to Fortune’s Most Admired Companies list. I believe these strengths, our diversification, attractive product offerings and consumer centric philosophy will be even more critical to our success as we move forward. While there are reasons for optimism, industry wide inventory levels remain elevated and consumers remain highly attuned to competitive dynamics in the marketplace and are closely weighing incentives, pricing and spec offerings in their purchase decisions. And while affordability has improved over the last year alongside lower interest rates, wage growth and price discovery, I believe consumer confidence in the broader economic and political outlook will be critical for further demand recovery.
Matt said, I’m cautiously encouraged by the sales success we achieved in the fourth quarter of 2025 and by the early momentum thus far in 2026. Our fourth quarter monthly absorptions outperform typical seasonal patterns as our pace helped start steady from the third quarter defying the average mid single digit sequential decline we have historically experienced. This is notable considering that we carefully managed pace and price community by community and in some cases chose to be more patient as peers pushed through inventory into year end and held incentives on new orders stable sequentially. This momentum continued into January even with the winter storm disruptions and early signs are positive as the spring selling season generally kicks off in full force this week.
The fourth quarter strength was driven primarily by our premier Esplanade resort lifestyle communities which experienced 7% year over year net order growth. This was followed by a low single digit decline in move up sales while non esplanade resort lifestyle and entry level orders were down in the mid to high single digits on a mixed basis. Our orders by buyer group stayed relatively consistent quarter over quarter at 31% entry level, 49% move up and 20% resort lifestyle. From a market perspective, sales were strongest in our east and west areas, with most of our Florida markets, California and Phoenix increasing year over year, while our central region was slower due to softness across Texas, particularly in Austin.
As we look ahead, I expect 2026 to be another solid year for our organization, albeit one focused on setting the stage for a re acceleration of growth in 2027 and beyond. I’d like to walk through the moving pieces that are influencing our outlook for this year, while Curt will provide the specifics of our guidance in just a moment. Given slower sales of To Be built homes in 2025, we entered this year with a lower than normal backlog of just over 2,800 homes. As a result, this year’s home closing deliveries and margins will be more dependent on sales during the spring selling season than is typical for our business.
Positively, we expect to accelerate the number of new community openings in 2026 from 2025 with well over 100 new outlets planned, including over 20 new Esplanade outlets which are already supported by deep interest lists. The majority of these outlets will open for sales in the first half of the year and begin contributing closings in the second half and into 2027. In addition, the improvement in construction cycle times over the last two years has greatly enhanced our production flexibility with homes now able to start well into the third quarter and still closed by year end in many of our markets.
Based on targeted consumer groups in the move up and resort lifestyle segments where personalization is valued, we expect new community openings to help shift our sales mix back to a more balanced mix of spec and to be built orders. We are already seeing signs of this shift back to more historic preferences with to be built sales in January gaining 700 basis points of share versus the fourth quarter when we sold a record number of intra quarter spec closings. Given the meaningfully higher average gross margin on to be built homes, we believe this mix shift will be an important driver of our long term margin potential.
However, in the near term, while we have reduced our spec home inventory by 24% since the second quarter of 2025, we still ended the year with nearly 3,000 unsold homes, including just over 1,200 finished homes. We are focused on continuing to responsibly sell through this inventory while being highly selective in putting new specs into production. This inventory management is expected to temporarily impact our gross margins in the first half of the year. Looking further out, we continue to target outsized growth over the next many years, including a continued aspiration to reach 20,000 closings, but we will not do so simply for growth’s sake, our capital allocation and strategic priorities are firmly rooted in generating attractive returns on our invested capital throughout housing cycles.
With competitive pricing pressures unlikely to meaningfully abate in the foreseeable future and housing fundamentals continuing to evolve, we are taking proactive steps to ensure our portfolio remains well positioned to perform and regardless of the market backdrop. For one, we are limiting incremental land investment in non core submarkets that primarily cater to the most price sensitive buyers. While these locations make up only a small portion of our overall portfolio, greater pricing pressure and a reliance on spec inventory in these areas has compressed margin opportunities versus comparable core markets over time. This shift will allow us to concentrate our efforts on serving more discerning entry level demand where our offerings are more strategically aligned.
As Eric will discuss, we believe we are best able to meet the need for affordable single family housing through our differentiated build to rent platform Yardley with a model that is both financially sustainable and supported by compelling demand tailwinds. We also expect to reinforce our focus on the first and second Move up segments which have long represented the core of our company’s expertise and customer base. These buyers value the choice, community development and prime locations that distinguish our offerings and often invest in lot and option selections that help sustain above average margin and returns. In 2025, these combined lot and option premiums represented nearly 19% of our base price.
In addition, demographics in the Move up segment are highly supportive of future growth with outsized net population gains projected among 40 to 55 year olds over the next decade behind only those age 70 plus. At the other end of the consumer spectrum, we will also continue to invest in the differentiated strength of our resort lifestyle brand Esplanade. Unlike traditional active adult offerings, Esplanade communities deliver a lifestyle first experience complete with luxury amenities and concierge level services that extends well beyond the home itself. This unique value proposition drives superior home prices and gross margins that consistently exceed the balance of our business.
With a strong pipeline of Esplanade communities coming soon and opportunities for brand expansion in many of our markets, we expect this segment’s contribution to our bottom line to grow meaningfully in the years ahead. And finally, we are doubling down on innovation across the organization. From the sales floor to purchasing land due diligence, financial services and back office functions, we have made significant strides in deploying our proprietary digital sales tools to red friction during the customer journey and AI enabled processes to enhance efficiency and manage costs. For example, we have developed a proprietary AI powered platform that today houses digital tools and AI agents spanning purchasing sales, customer service, financial services and employee resources on the sales floor.
Our customer360 agent gives field leaders a comprehensive real time view of our customers journey from contract through warranty in purchasing. AI powered tools allow our teams to analyze purchase orders and query procurement data using natural language while also enabling our purchasing standardization initiatives. We will continue to scale these technologies to better serve our customers, streamline our operations and strengthen our competitive position. With that, let me now turn the call over to Eric.
Erik Heuser — Chief Corporate Operations Officer
Thanks Cheryl and good morning everyone. At year end we owned or controlled 78,835 home billing lots, of which 54% were controlled off balance sheet. This compares to 86,153 lots at the end of 2024 of which 57% were controlled. The decline in our controlled ratio, which we expect to be temporary, reflects the impact of normal course takedowns in a few of our larger assets that were being seller financed as well as recent walkaways from controlled lot deals. As we have reevaluated our pipeline against current market conditions over the long term, we continue to target a controlled ratio of at least 65% as we seek to optimize our capital efficiency and manage portfolio risk based on trailing twelve month home closings.
We owned 2.8 years of lots out of a total of 6.1 years of controlled supply at year end. This was similar to 2.8 years owned and 6.6 years controlled at the end of 2024. The majority of our lots remain in prime locations within core submarkets where we see the strongest long term fundamentals. While we selectively invested in tertiary locations as work from home expanded, we have since shifted that limited portion of investment allocations back to core markets. Notably, 85% of our 2025 investment approvals were deemed to be in core locations based on consumer desirability. Core recent consumer research reinforces this focus.
Most of our buyers view their chosen community as core and they consistently tell us that the overall community design is as or more important than the home itself. Furthermore, 80% of our buyers say that wellness is important to their purchase decision and even a higher percentage in our esplanade communities where hundreds of residents hold wellness club memberships. As a result, we believe our emphasis on prime locations, thoughtful community development and amenity offerings position us well, particularly as national new home supply remains elevated, especially at the entry level. In 2025, home building land investment was approximately $2.2 billion, down slightly from $2.4 billion in 2024.
This was below our prior full year target of approximately $2.3 billion, reflecting our cautiousness in approving new land deals and additional phases in the current market environment. With a healthy land pipeline already controlled, we expect to invest around $2 billion in 2026 with a renewed emphasis on opportunities in move up and resort lifestyle positions consistent with the strategic priorities discussed by Sheryl before wrapping up, I’d like to now spend a moment discussing our build to rent business. Yardley Yardley develops rental communities akin to horizontal apartments that blend a single family living experience with complete with private backyards and amenities with the affordability and flexibility of renting.
Developed exclusively as rental homes, these communities provide a desirable and affordable solution for consumers looking for an alternative to traditional multifamily rental options. Unlike traditional single family rentals of scattered home sites, our Yardley communities are zoned and mapped as single tax parcels and transact like multifamily assets. As a result, and given what we have come to understand to date, we do not anticipate any impact from the Administration’s recent executive order aimed at the single family rental market. In the fourth quarter we sold one Yardley community for approximately $55 million. At year end we had a total of 46 Yeardley projects owned and controlled, representing approximately 10,400 home sites across nine markets in Arizona, Texas, Florida and the Carolinas, representing one of the industry’s largest build to rent pipelines.
Approximately 17 of these projects will be in profitable leasing operations this year, seven of which are expected to reach targeted stabilization levels over the next 12 months. Once stabilized, we evaluate individual or packaged disposition strategies dependent on market dynamics and purchaser and equity sentiment supported by our $3 billion land bank with Kennedy Lewis, we believe that we are well positioned to continue to efficiently and prudently scale this unique rental offering in the years ahead as less than 10% of Yardley’s total units are fully on our balance sheet. Now, I will turn the call to Curt.
Curt VanHyfte — Chief Financial Officer
Thanks Eric and good morning everyone. I will review the details of our fourth quarter and full year 2025 financial performance. For the fourth quarter, reported net income was $174 million or $1.76 per diluted share, while our adjusted net income was $188 million or $1.91 per diluted share after excluding the impact of pre acquisition abandonment charges and the loss on the extinguishment of debt related primarily to the redemption of our 2027 senior notes. For the full year, reported net income was $783 million or $7.77per diluted share while adjusted net income was $830 million or $8.24 per diluted share.
In addition to the fourth quarter adjustments noted previously, full year earnings were also adjusted for real estate impairments, additional pre acquisition abandonments and warranty charges incurred earlier in the year. Now to sales Net orders in the fourth quarter totaled 2,499 homes, which was down 5% year over year. This decline was driven by moderation in our monthly absorption pace to 2.4 homes per community from 2.6 a year ago, partially offset by a 1% increase in our ending community count to 341 outlets. This was supported in part by improved cancellation trends. As a percentage of gross orders, cancellations were 12.5%, down from 15.4% in the prior quarter and 13.1% a year ago.
As Cheryl noted, we have well over 100 communities expected to open this year, including over 20 new outlets in Esplanade communities. These openings are expected to drive high single digit outlet growth to 365 to 370 outlets by year end. For the first quarter we expect to end with around 360 communities. Turning to closings, we delivered 3,285 homes in the fourth quarter at an average price of $596,000, generating home closings revenue of approximately $2 billion. Compared to our guidance, closings volume was at the high end of our expected range and the average price was slightly ahead of expectations.
For the full year we delivered 12,997 homes at an average price of $597,000, producing approximately $7.8 billion of home closings revenue. Cycle time improvements continue to be a major driver of efficiency. During the quarter we achieved about one week of sequential improvement, leaving us more than five weeks faster year over year and over nine weeks faster than two years ago. These improvements enhance our ability to flex production and manage inventory, allowing us to start homes later for year end closing dates. In the fourth quarter we started 2.1 homes per community, equating to 2,136 total starts.
We ended the quarter with 5,682 homes under construction, including 2,956 specs of which 1232 were finished. Our total spec count was down 11% sequentially as our teams continued making progress in right sizing our inventory positions by community. With these focused sales efforts expected to continue through the first half of 2026. Based on our backlog sales expectations and cycle times, we currently expect to deliver around 11,000 homes this year, including around 2,200 homes in the first quarter. We expect the average closing price to be approximately $580,000 in the first quarter and between $580,000 to $590,000 for the full year.
Turning to margins, our home closings gross margin was 21.8%, slightly above our prior guidance of approximately 21.5%. This compares to 22.1% in the third quarter of 2025 and 24.8% in the fourth quarter of 2024, reflecting higher incentive levels and a greater mix of lower margin spec home closings. During the quarter, spec homes accounted for 72% of sales and 66% of closings, up from 61% and 54% respectively in the fourth quarter of 2024. For the full year, our home closings gross margin was 22.5% on a reported basis and 23% adjusted for inventory impairments and warranty charges.
This compares to a reported margin of 24.4% and an adjusted margin of 24.5% for the full year 2024. In the first quarter we expect our home closings gross margin exclusive of any inventory related charges to be approximately 20% reflecting a higher share of spec homes. As we prioritize the sale of existing inventory beyond the first quarter, we expect gross margins to improve gradually throughout the year driven primarily by an increase in the share of to be built home deliveries and a modest reduction in incentives as the year progresses. However, the ultimate level of incentives will be highly dependent on consumer demand during the spring selling season and interest rates.
We expect construction costs to be relatively stable while lot costs are expected to be up in the mid single digit range. As we gain greater visibility into the spring selling season, we will look to provide greater detail on our full year margin expectations. We also maintain strong overhead discipline. Our SGA ratio was 9.9% of home closings revenue in the fourth quarter and 9.5% for the full year, a 40 basis point improvement compared to 2024. This expense leverage was driven primarily by lower payroll related costs while ongoing strategic consolidation efforts and efficiencies created by our digital tools further improved our cost management.
For 2026 we expect our SGA ratio to be in the mid 10% range. During the quarter we incurred net interest expense of approximately $12 million up from approximately $6 million a year ago due to an increase in land banking activity. In 2026 we expect net interest expense to increase modestly year over year. Financial services posted another strong quarter with revenue of approximately $49 million. The team achieved an 88% capture rate supported by competitive mortgage offerings and strategic alignment with our home building operations. Among buyers using our mortgage company qualification metrics remained strong in the quarter with an average credit score of 750, down payment of 21% and household income above $183,000.
In addition to the strong average credit profile, our customers and backlog were secured by average deposits of approximately $44,000 at quarter end. Now onto our balance sheet, we ended the quarter with strong liquidity of approximately $1.8 billion. This included $850 million of unrestricted cash and $928 million of available capacity on our revolving credit facility. At quarter end, our net homebuilding debt to capitalization ratio was 17.8%, down from 20% a year ago. During the quarter, we repurchased 1.2 million shares of our common stock outstanding for $71 million. For the full year, we repurchased a total of 6.5 million shares representing approximately 6% of our beginning diluted share count for approximately $381 million.
As seen in this morning’s earnings release, our Board of Directors approved an increase and extension of our share repurchase authorization to $1 billion. This program expires on December 31, 2027 and replaces our prior authorization. We remain committed to disciplined and returns driven capital allocation strategies, including the return of excess capital to our shareholders. After investing in profitable growth opportunities and prudently managing our liabilities. In 2026, we expect to repurchase approximately $400 million of our common stock. Inclusive of this repurchase target, we expect our diluted shares outstanding to average approximately 95 million in the full year, including approximately 98 million in the first quarter.
Now I will turn the call back over to Cheryl.
Sheryl Palmer — Chairman and Chief Executive Officer
Thank you, Kurt. To wrap up, I’d like to share a few closing thoughts on recent news headlines regarding the Administration’s focus on addressing the need for greater housing affordability and accessibility. As I shared last quarter, we have been encouraged by constructive dialogue with the Administration and progress being made in Congress to advance housing legislation and are prepared to participate in meaningful policy solutions. As you heard this morning, our focus on delivering the right product to our customers, whether that be home buyers or renters, is this organization’s guiding mission. We believe we have the platform to greatly scale our business as market opportunities present themselves and we will maintain our long standing discipline around capital allocation and investment strategies to create long term value for our customers, communities and shareholders.
Before I close, I want to express my sincere gratitude to our entire team for delivering a strong finish to 2025 and for the effort and dedication I know you will demonstrate as we move through 2026 together, we will continue to push our company forward and achieve even greater success as we refocus and recommit to all that makes Taylor Morrison so unique. Thank you to everyone who joined us today. And let’s now open the call to your questions operator. Please provide our participants with instructions.
Questions and Answers:
operator
We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star1 on your telephone keypad. To withdraw your question, press star1 again. Pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by now while we compile the Q and A roster. Your first question comes from the line of Matthew Bouley with Barclays. Your line is open. Please go ahead.
Matthew Bouley
Hey, good morning everyone. Thank you for taking the questions. Wanted to start around sort of the long term view around the mix of the business, the buyer segments and geographies. Interesting commentary there around, you know, where you’ll be leaning in and out of land investments in the future and sort of the favorable demographics for the move up population going forward. So I guess the question is number one, where do you see the entry level mix going over time and number two, just kind of, you know, anything around the, you know, specific geographies or sub markets to kind of help us understand, you know, where do you think you have the right scale, where you want to continue to lead into versus sort of where do you want to de emphasize? Thank you.
Sheryl Palmer
Thanks so much Matt. Appreciate the question. As far as the ultimate mix of entry level to the business, you know, we’ve generally been running something like a third, a third and a third and I would expect that you’ll see the first time buyer come down a bit. But once again, it’s not, it’s not necessarily about, you know, departing from the first time buyer business. It’s refocusing the business geographically where we don’t, you know, buy land in what I would call those more fringe or tertiary locations that attract a very different entry level buyer. And as we see movements in the markets, I think we’ve been, we’ve proven, we’ve seen over the years and we thought maybe it could be a little bit different during COVID that those more tertiary locations might provide a different experience coming out of COVID But the honest truth is it’s Just not the case that the further out you get, when markets slow down a bit, we see those come to a very different stop.
And the level of incentives required to get those first time buyers into a house, it’s tough. So it’s not necessarily about once again leaving. You’ve heard us over the years talk about the professional first time buyer, Matt, where that’s general dual income. I mean, more than 50% of our business today is millennials and we’re seeing more than half, if I’m not mistaken, Eric, of those millennials already buying their second house. So it’s really a subset of the first time. As far as geographic penetrations, I think we’ve talked over the last few quarters that we’ve pulled back some investment in California a bit, recognizing some of the underwriting constraints that we’ve seen there.
So I think you’ll see that, you know, geographic shift mix, but is beyond that, I would think you’ll conceit, you’ll continue to see us invest across our markets. When I look at the business, Florida continues to be, you know, we continue to be very bullish on it and it continues to be the home of our Esplanade brand. So I think you’ll see continued penetrations. Florida, Texas, you know, different, slight difference in. Slight difference in California, Phoenix, very steady for us, Colorado. So I don’t think you’ll see huge shifts in the geography.
Matthew Bouley
Okay, now that’s perfect. Thank you for that color. Cheryl. Really detailed second one, spec versus to be built mix. I think I heard you say 72% spec sales in Q4 and that you’ve sort of mixed somewhat back towards to be built year to date, if I heard you correctly. So is the intention to get back to 50, 50 and that happened in 2026 or sort of, what’s the timeline and intention around that mix?
Sheryl Palmer
Thank you. It’s a great question. Hard for me to be 100% certain and where that mix lands. What I’m excited about is we are seeing the consumer show up differently, Matt. I mean, last year it’s not like we ever changed our strategy and we wanted to sell less to be built, but what we definitely saw is the consumer. You know, our industry trained them. And the honest truth is that the incentives were stronger with a inventory home and the closer that home got to completion, the stronger the incentives and the, the buyer really began to appreciate the impact of that.
What we’ve seen since the first of the year is they’re showing up with more of a desire to buy what they want. Where they want it, how they want. It, they want to appoint the house in a way lot premiums have become quite important again. And so yeah, we’ve seen 700 basis points in January over the average of to be built in the fourth quarter. We have seen that continue in February. So I’m very encouraged about that. I’m not sure we were ever 50 50. We were probably 60, 40ish, Kurt. And you know, it’s kind of moved margin 5 percentage points. 5050 would be ideal. And maybe over time, Matt, as we continue to evolve the portfolio further away from the more attainable buyer, we might see that I would be pleased but surprised if we saw a 50, 50 mix in 2026.
You agree?
Curt VanHyfte
No, I agree. And I think, Matt, over the course of the year we’re going to work. Our way through that. That’s something that’s not going to happen overnight. Just kind of where we’ve made great progress with our spec inventory, I think as CHERYL yeah, but we still have a little bit higher number of finished inventory than maybe we would like. So we’ll continue to work our way through that and balance that with bringing in some of these to be built sales, especially on some of the new outlets that we’ll be opening over the. Course of the year,
Sheryl Palmer
New Esplanades. And yeah, I hope that helps. Matt.
operator
Your next question comes from the line of Alan Ratner with Zelman. Your line is open. Please go ahead.
Alan Ratner
Hey guys, good morning. Thanks for all the details so far. I appreciate it. First question, similarly, on the mix of the business, I just want to make sure I’m thinking about kind of Esplanade the right way in terms of it sounds like a lot of the community growth or at least the share coming from Esplanade is going to continue to rise. I know you showed that off at your analyst day last year. When we look at absorptions, kind of where they were running at in 25 and where you see that in 26 and beyond, should we think of any mix shift there, either higher or lower as more of the business comes from Esplanade? I think generally those are higher absorption communities, but just wanted to confirm that.
Sheryl Palmer
I’d say actually, Alan, I think they’re actually quite consistent with the rest of the business. You know, we might have a couple positions within. I mean, as you know, we probably have four or five communities per Esplanade. So we might have some that, you know, run in a low three, some that run in a high two. But I think on average they’re pretty consistent. Just for clarity, as we talk about those 20 new outlets, that’s probably, you know, four or five new communities. But I wouldn’t see any significant change in the pace. We’ll continue to aspire as we see some market wind to get back to that annualized pace of a low rate.
But as I said in the prepared remarks, it’s just not our intention to just throw inventory in the ground and sell at all costs, given I think the value creation that we have with our land holdings.
Alan Ratner
Makes sense. Second question on the cost side. I know you mentioned that your outlook is for pretty flattish construction cost this year and certainly I think cost has been a nice tailwind in general for builders over the last year. So, you know, we’re starting to see lumber prices pick back up again. There’s a little bit of increased chatter about maybe some cost increase announcements around the new year, which I think is fairly normal for this time of year. But you have the headlines around Ice Raid still out there. So I’m just curious, is there any risk to that outlook based on what you’re seeing here the first six weeks or so of the year? And generally speaking, where do you see cost trending beyond?
Curt VanHyfte
Hi Alan, great question. Just kind of a little backdrop on the cost side. You know, we saw tremendous, you know, teams did a lot of work in 2025 on our house cost initiatives. Very proud of what we were able to accomplish. And to your point, lumber here more recently is starting to run up a little bit, but our teams continue to focus on house cost reduction strategies, working with our trade partners, working with our suppliers. And so we think we have the ability to hope, you know, to offset some of those potential headwinds that are out there through just our continued work on optimizing the business, whether it’s through our discussion with our trade partners, our suppliers, or just our continued work on optimizing our floor plans, you know, value engineering, our new communities, you know, all those different type of tactical things.
So it’s something that we’re looking at and watching and something the teams are very focused on.
Alan Ratner
Thanks a lot. Appreciate it.
operator
Your next question comes from the line of Trevor Allanson with Wolff Research. Your line is open. Please go ahead.
Paul Przybylski
Good morning. Actually, you’ve got Paul Przybylski on. I apologize if I missed this, but good morning. Could you bridge the sequential gross margin decline for 1Q. You know, among leverage incentives, land inflation mix, et cetera, And I think you. Said the incentive environment was stable in 4Q. If that remains the case, in 1Q, should we expect a gross margin, you know, in 2Q similar to 1Q?
Curt VanHyfte
Great question, Paul. Yeah, we’re not going to probably talk further beyond Q1 today. I think in our prepared comments we did talk about a gradual increase in margins over the course of the year just because of the change in mix to a higher concentration of to be built homes. And of course as we work our way through our existing inventory, you know, from Q4 to Q1 sequentially, the margins are down, I think 180 basis points. And that is in large part from a mix standpoint. A, we pulled in some higher ASP and higher margin homes in 25 into Q4.
And as a result now we have a few more of those entry level kind of tertiary kind of community closings coming through Q1. And so as we work our way through that, you know, we’ll, we’ll see our margins, you know, in line with that guide that we, we put out there. So and relative to incentives, as Cheryl alluded to in our talking points, they were modestly in line from an order perspective, but they were kind of at the end of the day they stay, they’re remaining elevated, so to speak, from Q4 to Q1 from a closing perspective.
Sheryl Palmer
And maybe Kurt, the only other thing I might add is obviously, Paul, we’re going to take price as the market allows. You know, I was interested that in the fourth quarter we did see base prices increase in more than half of the communities that had been opened the prior year and more than a quarter of our total communities. And so if the opportunity exists, we’re going to continue to take base price increases, reduce incentives, which is where we’re getting the confidence to say we expect Q1 to be the low point of the margin.
Paul Przybylski
Okay, thank you. And then I guess you talked a. Lot about the 100 new community openings this year. How have absorptions been performing in your. New communities relatively to legacy? Are they still, you know, seeing the historical spread?
Sheryl Palmer
Historical spread? I mean I’m excited about the new communities we’re opening and I can give you a couple examples. I might have mentioned in prior quarters that we were opening a new community in Phoenix. It’s over 1200 lots. I think we have five positions. We opened it in the first forth, some of at the end of September, one or two, one position in October. We’ve got well over 100 units sold in there already. So I would say pace is there. Really, really strong one that’s been, it’s a beautiful master plan called Verdin. When I look at some of our Esplanade pre opening activities and what we call our signature VIP events.
I mean some of these communities have waiting lists or interest lists, not waiting. We haven’t started sales interest list, hundreds to thousands of names. So there is this activity that we’re seeing. We’re also seeing traffic generally has picked up in the first of the year. When I look at web traffic year over year up in most all of our divisions, so both new and old, I think we are starting to see a little traction. And you know, it’s early days, like I said, generally we see spring kickoff after Super Bowl. So here we are. So if we can continue that, then I think that gives us some upside to the year.
Paul Przybylski
Great. Thank you very much.
operator
Your next question comes from the line of Michael Dahl with RBC Capital Markets. Your line is open. Please go ahead.
Michael Dahl
Hi, thanks for taking my questions. Cheryl, Just to pick up on the last comment around kind of seasonal improvement and similarly, similarly, your opening comments about the improvement, obviously, like it hasn’t been a very normal period of time the past number of months. So just help us dial that in a little bit more. Like obviously seasonally you should see traffic pick up 4Q better than normal. Seasonal sequential change in orders but off worse than normal. So what are we actually talking about in terms of quantifying the pace dynamics that you’ve seen over the past couple of months or January into Feb.
More specifically?
Sheryl Palmer
Yeah, no, it’s a fair question. And you know, you don’t, I don’t want to get too over my ski tips, Mike, but what I would tell you is, you know, the improvement we saw through the fourth quarter, December being better than November, that would be something relatively unusual in my 10 year. January better than December. Okay. We should expect that. And the good news is we got it. And like you said, given the volatility that we’ve seen over the last year, I take each of these as, you know, positive green shoots. I’d say it’s a little and honestly, and I think we said it in our prepared remarks, what made January even more, I don’t want to probably a better word than sensational, but strong was the fact that we had a real significant weather event and you know, a large part of the country we had, we were closed in many of our communities for days in Texas and the Southeast and we still saw a nice January finish.
And I give a lot of credit to our virtual tools on the ability to be able to continue to work with these consumers even when they couldn’t come into the sales Office February, we’re 10 days in a little early. I would say, you know, generally similar. You know, I’m not it’s it’s hard to make a trend in 10 days. We’ve got some communities that are doing really well and ahead of pace and some that aren’t quite there yet. We had a strong finish. We’ve also had weather into early February. So all in all I’d say generally supportive of kind of normal seasonal trends.
To your point, we haven’t seen in some time. So it’s nice to see that momentum building.
Michael Dahl
Okay, thanks. And maybe just one quick one on that, just to put an even finer point on that. Are we talking absorptions now? Flat year on year, up year on year. So down a little year on year. But then my second question is really then on the I want to make sure I understand the incentive Comments Appreciating you’re not guiding beyond one Q When you consider conceptually one cube and incentives improving, are you really just saying incentives should improve as a function of your build to order mix or do you also expect just from a market level incentives to improve through the year?
Sheryl Palmer
Well, obviously if we get continued traction and continued pickup in market, like I said, we’ll continue to take price when we can. We’ve also seen some relief from interest rates. I mean still somewhat volatile. I think we’re probably in the 6.1 range over the last few days. You know, sometime last year that was closer to mid to high sixes. So I think you’ve got a number of things working and I think, you know, once again we have the programs Mike, to help the customer and not spread those incentives like peanut butter. The TB built mix will certainly be a piece of it as well.
But I wouldn’t just point to that. I think there’s a number of factors that would help us. Now having said that competitive pressure and seeing what others offer is going to continue to also have an impact on the incentives the consumer continues to expect. But all in all I’m hoping there’s some discipline across the market and we see a pullback in incentives and have the ability to take price pace. I don’t know that I’ve seen. I’ve looked at Kurt year over year. I mean I think, you know, we had a strong first quarter last year so my instinct it’s probably a little down year over year Mike, but I need to verify that.
But just, you know, going into the investor day last year we had a really nice strong first quarter. But offsetting that you’re going to see some good community count growth as you saw us going from low 340 to something closer to 360 in the first quarter.
Michael Dahl
Okay, great. Appreciate it. Thanks, Charles.
Sheryl Palmer
Thank you.
operator
Your next question comes from the line of Michael Rehoat with JP Morgan. Your line is open. Please go ahead.
Michael Rehaut
Thanks. Good morning everyone. Thanks for taking my questions first. I just wanted to make sure I heard it correctly. And sorry if this is being a little repetitive, but just wanted to appreciate the trend of incentives that you guys have offered in, you know, from the beginning of the fourth quarter to the end of the fourth quarter. I think you said it was relatively consistent, but I just want to make sure I heard that right. And also when you think about the first quarter gross margin guidance, how much of that is reflective of just higher incentives flowing through more broadly versus mix and maybe flushing out some of the, the impact of selling some of the excess spec that you have in inventory?
Sheryl Palmer
I’ll let Kurt get into the particulars. But Mike, I really, as Kurt said in his prepared remarks, I mean we have a lot of inventory that we want to, even though we’re going to continue to get those to be built to hopefully a different customer, we need to work through that inventory in the first quarter. So we are expecting some pressure there. And if you look at just the ASP that we articulated for the first quarter and how far, you know, slightly lower than what we saw in the fourth quarter, I think it speaks to the mix.
And you know, as we’ve said, the more affordable positions require greater incentives. So we’re anxious to work through those and then see the TP bill be a healthier piece of the mix.
Curt VanHyfte
Yeah. And then Mike, on the incentives in our prepared comments, you did hear it correctly. They were relatively flat sequentially from Q3 to Q4 as we kind of, I think we alluded to that last quarter that we’re going to, you know, that we would have elevated incentives to move through based on that spec penetration for Q4 closings as we work through the inventory.
Michael Rehaut
Okay, I guess.
operator
Your next question comes from Rafe Jadrasich with Bank of America. Your line is open. Please go ahead.
Rafe Jadrosich
Hi, good morning. Thanks for taking my questions. Just for following up on the comment. On incremental land investment, the non core. Submarket sort of shifting away from that obviously makes sense given the context of what’s going in the market at the entry level today. When you think about are you finding better land deals at the move up and resort lifestyle sort of price points, is there just less competition in those markets are you just more bullish on. The long term fundamentals on move up. Reserve lifestyle vs entry level? You just talk a little bit more about the shift there and why the. Returns will be higher at move up. And then compared to entry level.
Erik Heuser
Hi Rafe. Eric. Yeah, good question. It’s really kind of a light pivot to where we’ve come from. Right. If we were to look historically we’ve really been at that 15% kind of exposure to kind of to kind of that tertiary entry level. And you know, coming out of COVID as Cheryl suggested, we saw such strong demand there and really were discerning, you know, how much of that work from home was going to be kind of sustainable. And so it moved up to 20 to 25% call it. And so it’s really a re pivot back to 15%. Direct to your question, I would say yes.
When you think about the competitors landscape and some of the peer group that’s very focused on that entry level, I would suggest that the land market has yielded some opportunity for us especially as the market has evolved. So I would say yes, it’s, it’s in, it’s what we’re good at, it’s what we’ve been historically focused on from an opportunity standpoint. That’s where we’re seeing some of the opportunity and I would expect some good performance looking forward.
Sheryl Palmer
And the only thing I’d throw on top of that raife is you know, when we’re talking about the first time buyer environment today with every sale it’s really working through with them. Can they make this work? When you look at the move up and the Esplanade buyer, it’s really should I given just the confidence things we’ve talked about, they have the capabilities, they have the balance sheet. They just want to make sure that the time it makes sense for them and they have the time, you know, it’s the right time to do it. It’s a very different formula when you’re dealing with this first time buyer and how many consumers we have to you know, pre approve to try to get folks that actually can make the final purchase.
And we don’t see that that is going to significantly change in the foreseeable future.
Rafe Jadrosich
Okay, that’s helpful, that makes sense. And then just following up on the land side, mid single digit lot inflation. For 26 for land that you’re contracting. Today, what’s the inflation that you’re seeing. And is there a point here where. We’D expect some, some relief like does it roll over in 27. How do we think about that through the year?
Erik Heuser
Yeah, as far as the land conditions out there and as you know, when we expressed in fourth quarter, you know, we really focused on paring to really the core opportunities, the cream of the crop for us. And I think others have done that too. And so you are seeing kind of a stable stabilization in the land market that’s resulting in something that approximates zero. So kind of low, low single digits in terms of land appreciation expectations in the market today. So we are seeing, and it was, we expressed in third quarter too. We’ve experienced a lot of success and working with sellers and renegotiating pretty much everything that comes through the investment committee.
Rafe Jadrosich
Thank you. That’s helpful.
Curt VanHyfte
Welcome.
operator
Your next question comes from the line of Kenneth Zenner with Seaport. Your line is open, please.
Kenneth Zenner
Good morning everybody.
Erik Heuser
Thank you.
Kenneth Zenner
Could you comment on the. I know central and you mentioned Austin, but could you talk about, you know, what the dynamics were that Saudi order rates for that whole segment come down first and then second. Are you guys going to try to. It sounds like you’re probably going to run starts in line with orders or is there going to be more of a front end load this year? That’s it. Thank you.
Sheryl Palmer
Yeah, maybe I’ll take the first one and then Kirk can grab the second. You know, when I think about Texas, it has been a little bit more, more of a mixed bag, Ken. You know, Austin has probably seen the greatest pullback of volume but honestly our locations are I believe, best in market and so we continue to see a strong margin. So we’ve been okay holding the line a bit there and not giving away, you know, quality, irreplaceable communities. The good news in Austin is we have seen spec inventory drop in more than half over the last year.
Land activity continues to be tough and but the teams are being very diligent and making sure we don’t get ahead of ourselves. Houston and Dallas, you know, slowed down year over year, but not what we saw in Austin. We did see paces hold serve in Dallas and Houston. Paces are ahead of the company average. So like I said, a little bit of a couple different stories. Similar to Austin though, margins have held up well in all of Texas. So I think Texas provides the perfect example of the important trade offs we’ll make between price and pace.
What will take a lower volume to protect the margin? As I look forward, Texas is an important part of the portfolio. I expect the state of Texas to be the highest population growth over the next, you know, three to four Years.
Curt VanHyfte
And then on the starts front, Ken, the last couple of quarters, we’ve, I guess, understarted relative to sales as we’ve kind of worked our way through our inventory. But on a go forward basis, I envision us being more sticky to the sales standpoint from a start standpoint on a go forward basis. So that’s what kind of we’re looking at as we’re sitting here today.
Kenneth Zenner
Thank you.
operator
Your next question comes from the line of Alex Barron with Housing Research center llc. Your line is open. Please go ahead.
Alex Barron
Yes, thank you. I think you just answered one of my questions. The other one was, I think there was, you know, more price discounting activity from yourselves and other builders in the fourth quarter. But do you feel like that’s mainly a 2025 thing and that the type of incentives that are now in 2026 has gone back to primarily, you know, rate buy downs and that type of thing, closing costs?
Sheryl Palmer
Yeah, I think that will continue to be part of the mix, Alex. As we’ve said, we continue to personalize our incentives by consumer. You know, when you’re dealing with the resort lifestyle, honestly, for them, it’s not as much about mortgage buy downs as it is maybe, you know, credit in the design center as they customize their home. I think the competitive market will help guide us there. But once again, I think we’re going to try to hold the line. Certainly we have some quality assets in large master plans where we’re going to be very careful about the inventory we leak in to make sure that we can protect the values.
Alex Barron
How are you just thinking in terms of specs per community or spec starts? You know, I know there’s different price points that you guys are working with, but maybe like, especially at the entry level, how are you guys thinking about what’s the ideal number of specs for your strategy?
Curt VanHyfte
Yeah, Alex, we have a, what I would call a spec management kind of program that we kind of follow. It’s a subdivision by subdivision or community by community kind of basis analysis. In entry level communities or multifamily communities, we’ll tend to have maybe a little bit higher spec counts in those communities. And then as we work our way up the consumer segmentation kind of profile to the move up and resort lifestyles, we’ll have less specs that we’ll have in the program. But at the end of the day. It all comes down to it’s a community by community analysis and what, you. Know, what the demand is. So we’re looking at those all on an individual basis.
Alex Barron
Got it. Okay. Best of luck, guys. Thank you.
Sheryl Palmer
Thank you.
operator
There are no further questions at this time. I will now turn the call back to Cheryl Palmer, CEO and Chairman, for closing remarks. Please go ahead.
Sheryl Palmer
Well, thank you very much for joining us today where we had the opportunity to share our 2025 results. And we look forward to talking to you at the end of the first quarter. Take care.
operator
This concludes today’s call. Thank you for attending. You may now disconnect it.