Public Homebuilder Earnings Show Margin Resilience, but No Demand Inflection

Second quarter homebuilder earnings have delivered a split verdict on the new home market. Among publicly traded homebuilders, which represent roughly 55% of the new home market, orders were a bit softer than we expected, but builders did a better job controlling costs and protecting margins than the order results alone would suggest.

Across the nine comparable builders that have reported results — CCS, DFH, DHI, KBH, LEN, MHO, MTH, NVR and PHM — net orders increased 1% year over year, aided by 8% expansion in community count. That was below the 4% growth embedded in our estimates. Homebuilding revenue (down 6% year over year) was essentially in line with expectations. The more constructive surprise was profitability: aggregate gross margin was approximately 20.3%, up 10 basis points sequentially and roughly 50 basis points above our estimate, though still down 210 basis points from a year ago. Roughly half of this upside was offset by higher SG&A expenses (10.2% of revenue, up 60 basis points year over year). 

The bottom line is that the hoped-for improvement following a disappointing spring has not developed into a broad demand inflection. Buyers remain payment sensitive and hesitant, and the seasonal slowdown is arriving with mortgage rates climbing to the highest level in over a year. At the same time, lower construction costs, leaner spec inventories and better pace-price discipline are giving builders more room to defend earnings than we anticipated. 

Orders Fell Short, but the Miss Was Not Uniform
D.R. Horton was the largest source of downside to our expectations, with orders flat year over year versus our forecast for 8% growth. The company accounted for nearly 90% of the group’s aggregate unit order shortfall versus our comparable estimates as management cited softening demand in May and June after an encouraging start to the quarter. Pulte’s 6% order growth, Dream Finders’ 15% increase, KB Home’s 4% decrease and Meritage’s 9% decline also came in modestly below our forecasts. 

There were positive offsets. M/I Homes posted 15% order growth versus our 10% estimate, while NVR’s orders increased 9% versus our 6% forecast. Both results were supported by better absorptions, not simply community count growth. Lennar's 3% order decline was modestly better than our forecast for a 5% decline and Century’s 3% increase was essentially in line.  

The quality of demand remains uneven. M/I described generally steady conditions and stronger move-up demand, while NVR’s prior price adjustments appear to have found a more competitive market-clearing level. By contrast, D.R. Horton said buyers became more hesitant as the quarter progressed, Lennar characterized traffic as inconsistent and urgency as measured, and Meritage described demand as soft but stable. Century’s monthly sales pace held steady during the quarter, although its July commentary was more cautious. The results do not point to a fresh leg down, but they also do not support a clean summer inflection. 

The Earnings Beat Was a Margin Beat, Not a Demand Beat
Seven of the nine comparable builders reported gross margins above our estimates. NVR led the upside at roughly 130 basis points, followed by Pulte at 100 basis points, M/I at 80 basis points, D.R. Horton and Meritage at 70 basis points each, Century at 40 basis points and KB Home at 30 basis points. Lennar was essentially in line at 10 basis points below our forecast, while Dream Finders missed by 30 basis points.

Reported EPS followed a similar pattern: six builders beat both our estimates and consensus. Construction cost savings did much of the work. D.R. Horton's stick-and-brick costs declined 5% year over year, Pulte's build costs were down 5%, Meritage's direct costs fell nearly 6%, Lennar's construction cost per square foot declined 7%, and Century cited a 5% sequential reduction in direct costs. Those savings offset elevated incentives, higher lot costs and weaker operating leverage.

Incentives Are Moving in the Right Direction, but Affordability Still a Challenge
The most encouraging change from last quarter is that incentive loads are beginning to decline at several builders. Lennar’s all-in incentive rate fell to 12.9% from 14.1% in the first quarter and 14.5% in late 2025. Pulte’s incentives declined 50 basis points sequentially to 10.4% of sales price, while Century’s fell 50 basis points to approximately 12%. D.R. Horton’s average mortgage buydown also eased modestly, and temporary dips in rates allowed Meritage to spend less than expected during parts of the quarter. 

This is progress, but it is not normalization. Incentives remain far above historical levels and buyers still require a compelling monthly payment. In addition, at least a portion of this moderation can be attributed to a temporary dip in mortgage rates in the middle of the second quarter, which has since reversed. 

Buyer mix is becoming a clearer differentiator. M/I’s affordable Smart Series represented 43% of sales, down from 52% a year ago as its move-up mix increased. Meritage is beginning a multi-year effort to move back toward roughly one-third first-time move-up deliveries, and Pulte continues to benefit from diversified move-up and active-adult exposure. These shifts reinforce what our survey work has shown: discretionary move-up demand is holding up better than entry-level demand, even if no segment is immune to rate volatility. 

Spec Inventory Is Better Controlled, Providing a Healthier Supply Backdrop Heading Into 2H26
Completed spec inventory is generally moving in a healthier direction, with total specs among the public builders down 13% year over year. Pulte ended the quarter with roughly 1.3 finished specs per community, within its target range. Meritage reduced completed specs 30% sequentially and 42% year over year, while Lennar lowered inventory to 2.1 homes per community from 3.0 in the first quarter. These reductions should reduce the urgency to discount in the seasonally slower back half. At the same time, Pulte and KB Home are increasing their build-to-order mix, which should improve inventory flexibility and support margins over time.

D.R. Horton was an exception on the headline number, with completed specs rising 38% sequentially after starts were increased when demand looked stronger early in the quarter. Still, the company reacted quickly by pulling back starts and completed homes older than six months declined 25% sequentially. D.R. Horton and Lennar also reduced their full-year volume outlooks rather than pushing inventory into an uncertain market. 

Execution Can Defend Earnings, but It Cannot Create Demand
The second quarter results are better than the order headline suggests, but the industry is not yet on a clean recovery path. Cost reductions have bought builders time, and lower finished inventory should limit the need for another broad round of discounting. Yet lumber prices have moved higher, fuel-related surcharges remain a risk and lot costs are still sticky, suggesting that the recent construction-cost tailwind will become less helpful in 2027. 

Demand is the bigger question. July commentary has generally been stable but uninspiring, and year-over-year order comparisons become more difficult in the second half. Builders can continue to manage starts, mix, incentives and overhead, but a sustained improvement in sales pace will ultimately require lower monthly payments, better consumer confidence or both. Down payments and substandard credit scores also remain major constraints on demand.

For now, the companies with diversified buyer exposure, stronger margins, build-to-order flexibility and solid balance sheets appear best positioned. The quarter showed that disciplined execution can cushion a soft market. It did not show that the soft market is behind us, and our current macro homebuilding forecasts (minimal growth in single-family starts or home prices through 2028) reflect this cautiousness.