Thank you, and good morning. Today’s conference call may include forward-looking statements, including statements regarding Lennar’s business, financial condition, results of operations, cash flows, strategies, and prospects. Forward-looking statements represent only Lennar’s estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in yesterday’s press release and our SEC filings, including those under the caption Risk Factors contained in Lennar’s Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

I would like to introduce your host, Mr. Stuart Miller, Executive Chairman. Sir, you may begin.

Very good. Thank you and good morning, everyone. Thanks for joining us. This morning, I'm here in Miami and joined by Rick Beckwitt, our co-CEO and co-President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and Bruce Gross is here, our CEO of Lennar Financial Services. Happy to have Bruce back in the seat. And of course, Alex, who you just heard from. Jon Jaffe, our co-CEO and President is on -- is out in California and on the line and will participate remotely. As usual, I'm going to give a macro overview and strategic overview of the Company. I'll be a little longer than usual. We've got some strategic matters that we want to cover. After my introductory remarks, Rick is going to walk through our markets as he did last time around. Jon's going to update supply chain, cycle time and construction costs, and give a little overview on land as well. I think that Rick and Jon will both talk a little bit about land. As usual, Diane will give a detailed financial highlight and we'll give some rough boundaries for the first quarter to assist in looking forward, thinking and modeling. And then we'll answer as many questions as we can. And as usual, please limit yourselves to one question and one follow up. So, let me go ahead and begin by saying that once again, the Lennar team has turned in excellent results for the fourth quarter and year-end 2022, which continue to enhance our positioning for evolving market conditions. Market conditions continue to deteriorate in the fourth quarter as the now well-documented interest rate driven sales slowdown and pricing correction intersected with the still stressed supply chain, high labor and material costs and elongated cycle times to make for…

Thanks Stuart. As you can tell from Stuart’s opening comments, the overall housing market has been reacting to a significant increase in mortgage rates, which has impacted affordability and home buyer confidence. While we continue to have many strong markets, in our more challenging areas, we've had to adjust base sales prices, increase incentives, and provide mortgage rate buydowns to maintain or regain sales momentum. As sales strategy -- our sales strategy has been to find the market clearing price for each of our homes on a community by community basis as quickly as possible, and price our homes accordingly. In many cases, we're solving to a monthly payment and not to a sales price. This requires a detailed understanding of community and product specific pricing, financing programs, traffic trends, inventory levels, and buyer sentiments. During the fourth quarter, our new sales orders declined 15% from the prior year on a 4% lower year over year community count. Our year-end community count was lower than we projected at the beginning of the year as we walked away and renegotiated on many communities. Jon will walk you through this as he discusses our land strategy. While our cancellation rate and sales incentives increased sequentially from the third quarter, our sales orders and sales pace per community was relatively flat throughout the fourth quarter, as we successfully executed our pricing strategy in most of our markets. To maintain and regain sales momentum, our fourth quarter new sales order price declined 9.5% sequentially from our third quarter with mix accounting for 250 basis points of the decline, and base price reductions and incentives, accounting for 200 basis points and 500 basis points, respectively. The combination of adjusted pricing and rate buydowns have created a more stabilized environment. As we cleared out or closed…

Thank you, Rick. Our well executed strategy of pricing to market to maintain sales volume as Stuart and Rick have detail, set us up for the next part of our game plan, our construction strategies. Simply put, by continuing to sell homes and generate cash flow, we'll keep starting homes. Our construction playbook has three primary areas of focus, lowering construction costs, reducing cycle time, and achieving even flow production. Properly executed, these strategies improve both, gross and net margins, allowing us to profitably continue the cycle of finding the market to sell homes. Let me address each area. Reductions in construction costs have historically lagged the change in market conditions. While that is true this time, what is different is the speed of change in the market conditions has caused a sharp reduction in industry wide starts, thus speeding up the availability of labor and materials for Lennar. This is very quickly turning the shortages of the last two years into excesses. Taking a look back at our fourth quarter, construction costs continue to increase as we guided on our last earnings call. Increases in both materials and labor resulted in a total direct construction cost increase of 6% and 16% sequentially and year-over-year, respectively. Moving forward, our process is a three-pronged approach of first, working with our trade partners to reduce the cost of labor materials; second, evaluating all specifications in the home; and third, an intense value engineering review. We have very strong relationships with our trade partners. We have demonstrated to them that we have taken the first step by lowering sales prices to drive sales, and they understand this and understand the dynamic of labor availability as overall starts slow and they're working closely with us to lower their prices. Since the beginning of our…

Thank you, Jon, and good morning, everyone. Stuart, Rick, and Jon have provided a great deal of color regarding our homebuilding performance, so I don't need to provide any additional details. Therefore, I'll spend a few minutes on the results of our other business segments and our balance sheet, some points already noted, and then provide high level thoughts for Q1 ‘23. So starting with Financial Services, for the fourth quarter, our Financial Services team produced operating earnings of $125 million. Mortgage operating earnings were $80 million compared to $77 million in the prior year. We benefited from a higher level of lock volume than expected as buyers locked in the attractive rates offered with our interest rate buydown programs. These discounted interest rates provided certainty to our buyers to avoid potential future rate increases. Title operating earnings were $44 million compared to $30 million in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per transaction as the team continues to focus on efficiencies through technology. These solid results were accomplished as a result of great connectivity between our homebuilding and Financial Services teams as they successfully executed together through this choppy environment. Then turning to our Lennar Other segment. For the fourth quarter, the Lennar Other segment had an operating loss of $106 million. This loss was primarily the result of non-cash mark to market losses on our publicly traded technology investments, which totaled $96 million. Although, it's been a very tough environment for technology stocks, we have found and continue to believe that there are incremental operating efficiencies through these technology partnerships for both, our homebuilding and Financial Services platforms, as well as greatly improving our home buyer's experience. Then turning to the balance sheet. As we've all…

[Operator Instructions] Our first question comes from Stephen Kim from Evercore ISI. Please go ahead.

Thanks very much, guys. I appreciate all the information, very exciting times here. I thought that the most interesting thing you commented on today was your outlook for gross margins in 1Q to be the low point for the year. And so I wanted to explore that a little bit. I think you -- there were a few components. I think you talked about lower costs that would start flowing through -- I think you said in the back half of 2Q and mostly into the back half of the year. You also mentioned, I think, Jon, that lumber benefit is already in the numbers for 1Q. So, that's probably not the reason. So, there's two other potential reasons I could see why margins might improve. One of them is that maybe you're benefiting from having lower the level of specifications or finishes, finish level of the homes, and so its cost in U.S. Maybe -- and those would be delivered in Q2? Or that maybe you've seen an improvement in buyer demand over the past several weeks. And so, I was wanting to see if you could comment on either of those. And also tell us what range of mortgage rate are you assuming in your outlook?

So, that's a lot of questions, Steve. So, let me start by saying we do expect that our first quarter margin, we think, is going to be a low point. I think it derives in large part from a very general notion, and that is we've gotten out ahead of the migration downward in pricing. We've done it by price reduction and by incentive structure, as noted. And we took a very strong first move in that regard in order to keep the machine, the volume moving in the right direction. With that in mind, we started the reconciliation process with land. Remember, our land position is much shorter term than it's been in past. And therefore, we have flexibility. And so, we think that we'll be able to reconcile some land pricing. And as far as our trade partners are concerned, I think I was clear, we've been working with trade partners, both on labor and material. Some of those materials like lumber are already filtering through, just at the very early stages filtering through some of the price reductions that will build as we go through the year. But we are working hand in hand with our partners. And given our volume and pickup in market share, there's a lot of labor, a lot of other people out there that are looking to do business with us. We think we'll be able to bring our pricing down. And additionally, we've been hard at work, reconciling efficiencies in the homes that we built, changing product where appropriate and making sure that we are best positioned at sales prices, at interest rates that are higher to be able to access the market and refine our margin as we go through the year. You asked a question as what our assumption is relative to interest rates. We've kept a flexibility in our numbers. We recognize that the Fed is focused on unemployment numbers and wage numbers and are likely to continue raising interest rates. But the tenure has had a mind of its own, and mortgage rates have been trending down. I noted the flexibility, the shock absorber nature of our program, our dynamic pricing program that we have in place. All of it is almost agnostic to interest rates. We're going to keep moving through the year, adjusting our pricing and the affordability for our customers in order to do what we can to maintain volume. So, we don't have a forward view on interest rates that defines how our program is working, we're going to be adaptable to the interest rate as it evolves through the year. All indications though are that we're probably not going to see much more spiking and more moderating relative to interest rates. But that's a toss-up question.

I guess the only thing I think I would add to that is very thorough -- is that -- our gross margin is impacted by the volume of closings that we have at every quarter. And Q1 is most likely going to be the lower volume quarter. And as we close more homes, as Diane said in her description, the level field overhead that gets absorbed is spread over more closing, so that has a positive impact on margins.

And I know Jon wants to add something. Go ahead, J.

I just want to clarify, Steve, on what I said about construction costs. As I noted, we're currently working closely with our trade and adjusting contracted pricing. That's what I was referencing in terms of will start flowing through in the second half of the second quarter. The biggest needle mover is lumber, which moved down throughout the year, and we will see a benefit of that throughout the entire second quarter.

Gotcha. Okay. That is helpful, Jon. So, in other words, you're not talking about deliveries in the back half of 2Q with that lower contracted pricing. That's going to be on stuff you're sort of starting in the back half of 2Q, I guess.

No, starting now and through quarter and even on some open commitments on homes already started. It's just that we'll see the first benefits of those renegotiated prices with trade starting to happen in the latter part of the second quarter, and we will see the full -- the benefit throughout the full quarter of lumber reductions that started happening in the summer of '22.

Okay. That's helpful. I appreciate that. Second question is on your owned lot count. I know you talked a lot about the ratio in years and all that. But your actual number of owned lots declined for the third straight quarter, and it's down almost 20% from 1Q. And so, I'm wondering, can you help us anticipate how much the actual owned lot count might fall over the next few quarters if market conditions stay challenging and conversely, what kind of market conditions would you need to see for your owned lot count to start rising again?

Diane, do you want to start that one off?

Yes. I mean, Steve, the way I look at it, I think that it's a positive direction that our owned -- home site count has been going down. The desire is to always protect the balance sheet and reduce risk. So, the growth really comes from controlling as much as we can and keeping our owned at a much lower level. But the owned home sites really should be primarily finished home sites where we're going to put a shovel on the ground pretty quickly. So, I'm not bothered by the reduction of owned. The goal is to keep that as low as possible and keep growing the controlled percentage.

Well, and I think that basically, if you think about what we're doing strategically, really building the pipeline between our land bankers, our land bank programming and the execution strategy embedded in our volume-based programming. And that's just going to continue to build confidence. I think that you'll see our owned home site count continued to moderate and be right sized relative to the business to be able to adequately provide for either stable delivery levels or growth levels as we choose. But that confidence that we're building and that pipeline I think is really value-add for the future.

Great. Yes, I didn't mean to imply that. I thought that that was a bad thing, Diane. I certainly agree with you. It's a good thing.

Very good. It's good, and it's getting better.

Yes.

Next, we'll go to Susan Maklari from Goldman Sachs. Please go ahead.

My first question is thinking about the sales pace, would you actually maintain ahead of your historical normal level in the last quarter, despite everything that's going on, on the ground. And assuming that that does kind of tie to this broader strategy that you have around, inventory controls and cash generation, can you talk to how we should be thinking about the sales pace for next year? The ability to hold it perhaps elevated even as we do continue to move through this environment and what that will mean for the level of cash that you can generate in 2023?

So, looking at our sales pace for last quarter as well as our go-forward sales pace, we're going to keep -- as Stuart said, we're going to keep the machine going and feel that from an overhead and operational standpoint we get greater leverage by keeping that sales active. We know it's above where we were in 2019 from a pace standpoint and our focus is to keep and maintain that pace as we move forward into 2023.

I think you can expect a lot of consistency. I probably haven't spent enough time talking about our dynamic pricing model, but it is really at the core of how we're running our business, and we're doing it on a day-by-day basis, focusing on how do we get the right pricing for the customer base for today's affordability to maintain that sales pace. I think you're going to continue to see us working hard in that direction. As I noted, it has the ancillary business of informing our land banking pipeline, but the dependability they expected is the dependability they'll get. And we're moving through our pipeline of higher-priced land that was priced or bought to yesterday's pricing, and we'll be bringing in land that is more appropriately priced to current market conditions. All of this kind of works synergistically to really inform us to keep that volume and that sales pace consistent.

I would just add and remind you that our strategy has been and remains matching sales to our start pace, and we have a very steady start pace that will inform our sales pace as we move forward. That ties directly into the dynamic pricing model that as a tool our operators use to do exactly that.

Okay. That's all very helpful. And I guess it also leads to the next question of how do you think about the uses of that cash. You mentioned that you're obviously in a net cash position now as it relates to your balance sheet. What are some of the priorities? You bought back stock in this past quarter. Would you consider getting more aggressive there, or anything else that's on your radar?

Yes. So, I'm happy you asked that question. I know it's on the minds of many of our investors and people that follow the Company. We're not ashamed of having too much cash. In fact, in these -- in times like we've been in, it's a tremendous advantage and produces a lot of optionality. Looking backwards to this quarter, this was a tough reconciling quarter. Again, you have the clash of prices coming down in a very complicated supply chain that was in this repair, exacerbated by two hurricanes rolling through our primary markets. This was a very good quarter to focus on our balance sheet and cash generation. But here we sit in what we do with cash, we're likely to continue to generate cash with the program that's in place. Stock buybacks are clearly one of those avenues. We're constantly looking opportunistically at repurchasing stock. We did purchase some stock this quarter. But in the abundance of caution, we just decided to go slow before we go fast. Stock buybacks are on the table. But, also as we come around, we know -- and remember that in the body of my messages, we are going to sit with a production reduction, I think, it's going to be by a third, maybe more, a reduction in production of homes, both multifamily and single-family. We are not going to see the existing home market, putting a lot of supply in place because buyers are protecting low interest rates. And we're not going to have an inventory overhang. So, it is our belief that the duration of this correction is going to be somewhat smaller or more limited. And having additional capital enables us to be opportunistic in growing our business when those signals start to come our way as well. And you know us from the past. People have seen how we operate in the past. Lennar tends to be a first mover; we probably will be in this case as well. So, book to grow our business and to buy back stock and to pay down debt, all of these are viable uses of cash. We're fortunate to have the optionality to go slow first and then to accelerate and to pick and choose where the best returns are garnered.

Next, we'll go to the line of Ken Zener from KeyBanc. Please go ahead.

Stuart, an iconic movie says, ABC, always be closing, which requires you to start homes to optimize inventory turns, which reduces your land, your most cyclical asset. A simple strategy as many investors overlook when considering margins alone. My first question is, with starts leading orders, could you comment on how you balance the unit economics of, let's say, the lower margin, 5% versus the incremental cash flow of selling that unit as your land goes down 20% or perhaps 50% when your actual inventory units decline because I think the idea is the income statement is nice, but the cash flow that comes from these choices is much more cyclically important.

Well, in your question, you basically embedded the entirety of our strategy because the reality is if you look backwards, we have been reducing our SG&A to extremely low levels so that as margins come down, we're still producing cash and we're producing profit and bottom line. But at the same time, it enables us in tougher time to continue turning our inventory, turning our land inventory, as I noted, our higher price purchased to yesterday's pricing land inventory. We will continue turning that. It is cash productive and we'll redeploy that into repriced land purchases for the future. All of this is symbiotic and works to drive cash flows, replenish inventory appropriately positioned while keeping the trains running on time and generating cash flow, improving the balance sheet and maintaining profitability. So, that is basically the game plan.

Great. And then second question, Diane, I think your comments on owned land, 2.5 years versus 1.9 [ph] absent WIP is new. Within that context, my question is if you do 12,500 starts at 50,000 annualized, just to make it simple, does that suggest or imply your ending inventory units will probably be down versus -- year-over-year versus your 60,000 closing because that's going to be potentially an enormous amount of cash flow from that unit reduction? Thank you.

Yes. I think that's right, Ken. I mean, as you've heard us say consistently, we're very focused on keeping volume up, capturing our market share. We're enthusiastic about resolving some of the supply chain issues. You heard Stuart mention that we think embedded in our balance sheet might be about $1.5 billion. So, whether that's the exact right number or not is we can debate. But directionally, the point is there's a lot of cash sitting on our balance sheet. And so, as we unwind all of that, that would lead me to believe that you'll see lower inventory level and low home and construction -- construction.

And by the way, it reminds me of a meeting that we had with one of our investors some years ago, where we mapped out -- and when I say some, I’m talking about like 6 or 7 or 8 years ago, where we mapped out exactly the strategy. You remember that, Rick?

Yes.

We mapped out exactly the strategy and said, this is what we're going to do, all the way down to the reduction in that inventory level, and this is exactly the game plan.

Our next question is from Matthew Bouley from Barclays. Please go ahead.

So, I just wanted to ask about sort of the, I guess, the downside scenarios. The balance between price, margins and pace, clearly, your price taker model is successfully keeping that sales pace elevated and you're getting the cash generation out of that. And I know you mentioned the 21% gross margin is going to be -- or potentially the low point for the year. But my question is if market conditions were to deteriorate, kind of where the limit is to your willingness to trade margin further? Is there somewhere where you would draw the line? Basically, how does the model kind of change when you get to these levels on gross margin? Thank you.

Well, let me just say that as I noted just a minute ago, we've been preparing for this for quite a long time. We have been focused on building efficiencies, sticky efficiencies into our SG&A, especially at the division level over the past years, quarter-by-quarter, basis points by basis points, we have been refining, reducing the cost of doing business. I think that if market conditions were to continue to deteriorate, we're going to continue to lean into the consistent program going forward. We have a lot of room to be able to make those adjustments. I think that there's been some concern about notions of impairment. There might be some modest impairments that flow through with further deterioration, but it's not going to be the significant kind of programming that you've seen in the past. I think we've got really terrific shock absorbers within our operating platform to be able to continue the program even as -- even if you look at a downside scenario, we'll continue to be building and volume focused through alterations of the market.

And you really can't underestimate the leverage that we get in working with our trade partners as things slow down across the board. People are looking for work. If we're going to be the ones out there to do -- starting homes, we're going to get cost concessions, bringing cost concessions from our trade partners, from our land partners, and we're just going to continue, as Jon said, value engineer and re-specify product in order to make it more affordable, so we can have more higher margins.

And second one, Stuart, you just alluded to it, but I wanted to ask about the impairment side. You did take the small write-downs in the quarter. It sounds like you're -- as you just mentioned, that you might expect some smaller ones going forward. But just kind of I guess, number one, given what you did write down this quarter, did that kind of clear the deck, so to speak, or as you think about potential market deterioration, what would be that kind of next decile of communities where there is risk? Just kind of any elaboration on owned land impairments and then further option walkaways?

Okay. Look, I understand the concern and the black box of impairments that naturally people feel. If you look historically, we've been very quick to get ahead of the curve. And so, when you ask the question, did we clear the decks, we're always clearing the decks and that's how we think about it. The answer is as if the market is going to continue to deteriorate, and we can't put a boundary on what that might mean. We're going to always be straightforward and give as much visibility as possible. And I don't think there's additional visibility to give right now. I think that the size and scale of what we took as an impairment is about all there is. We really -- especially given cash and balance sheet and everything else, we really shook the tree this time and -- as we always do, and the -- cleared the decks, as you say. I think you're going to consistently see that with Lennar. It's always been the case with Lennar. Diane, do you want to add to it?

Yes. I was going to say, Matt, if you think about what you're looking for an impairment, it's where you're finding negative net margins. And so if you look at where our gross margins are, it's not a surprise that our impairment split between backlog and active communities. On the active communities side, it was 8 communities, and we have 1,200. So, there's always going to be some communities that have negative net margins. But given where we are as a company on average, I don't think that the concern for net margin should be as great as some people are articulating. There's always going to be some backlog adjustments. There's always going to be some communities that are below the norm, but I don't think we're anywhere near the widespread impairments that people are voicing concern over.

Next, we'll go to the line of Truman Patterson from Wolfe Research.

Diane, congratulations on the cash balance. So first question is kind of three part with your dynamic pricing model. One, could you just elaborate on it a bit more with perhaps not giving away too much competitively, if you will. But second, I understand every market is different, but could you just discuss generally what level of pricing maybe below nearby competing communities is generally needed to move the inventory. And then three, you all, Stuart, I believe, said that incentives kind of accelerated through the quarter, discounts. Any way in orders, you could just kind of give us an understanding where you sat in November, December versus maybe a year ago?

So, was the first part that he was asking about the pricing model?

Dynamic, yes.

Yes, yes, the dynamic pricing.

And the one of the questions...

To be able to understand and really get into the pricing model, you'd have to talk to the inimitable Jeff Moses, and he doesn't talk to anyone. Keep it internally. But, do you want to go ahead and answer that, Diane?

It's really an incredible tool, Truman, and we really should spend -- and I'm happy to do that, I'm really happy to spend some time. It's much more involved than you would imagine. It's a home-by-home assessment, each home, each community, each market, and the tool looks -- of what we've sold that exact plan for over time. And it also looks at the market competition for that plan in that community in that market. So, it's a lot of detail, but the point is it truly gives us an unbelievable amount of real-time detailed information because that's really the only way that you can price. We talk about it at a very high level, but pricing really is at a planned community market level. And it allows us to be really flexible when pricing is going up as well as pricing is going down. We use the tool in all market conditions.

And it is real-time available to the local market as well as to the corporate office and everyone in between. And so that connected engagement really enables us to stay close to the market, close to the pricing and very interactive at all levels of the company.

And react quickly. Yes.

The other thing that tool does, you hear us throughout our strategies, talk about start pace and sales pace. This tool connects all of the dynamics and metrics Diane just referenced to that pace, so we can adjust in real time to make sure that we're not ever getting behind the pace that we want to be at.

Okay. Perfect. And then any -- I'm just trying to understand maybe the elasticity of demand with how much might be needed to move relative to some competitors nearby?

Well, as we said in the commentary, we're constantly evaluating what's going on with other competitors, what their inventory position is, what their pricing is, are they generating sales? And this is a very fluid conversation that Jon and I have with the regional presidents and the division presidents. We are all over this. And to the extent someone make a pricing adjustment and if we need to move something, we're going to move it. We want to stay ahead of it and hopefully have them follow what we do. And there's not anything that we're really not familiar with that's going on out there.

And it dovetails -- all of this dovetails with our digital marketing focus. We have a robust digital marketing group with data science component that dovetails exactly with the dynamic pricing program. So, we're generating -- we're generating the customer base and building the pricing that is going to appeal and creating the intersection.

And I think that the drop to mic or the proof in the pudding is, and Stuart mentioned that we've only got 900 completed homes in the Company right now. And in many ways, I would tell Jon, I’d like some more. Jon said he'd like less. We have our even flow and machine going and homes are being produced as we match them to sales, we've got the perfect amount of inventory.

Yes. And I'm going to say as long as you brought it up, we have 900 homes in inventory. We would actually be better with more of that standing inventory because of today's customer is...

Premium.

Yes, it’s premium. And I'd want to emphasize one more time there were no bulk sales at discounted rates to clear inventory. And you don’t always trust what you read. So, let's go from there.

Okay. Perfect. And then just on the vendor and contractor savings specifically, what inning of cost savings do you think we're in today? And as of, we'll call it, December 15th, are the savings primarily on the labor side, or are there certain materials, products, outside of lumber?

Look, we're clearly in the early innings because as the homebuilding industry is completing the fourth quarter of the year, you have for all builders really the largest production quarter, so labor has been -- has remained very busy while the market has slowed down prior to the fourth quarter. And as Stuart noted and I noted, it's -- that's why you typically always see a lag between sales prices moving down and then construction costs moving down. So, we're clearly in the early innings of that. We feel like we've got tremendous traction. And as I noted earlier, I think we'll see significant movement as we move through our first quarter, into our second quarter in terms of reductions. And that will happen primarily because starts have dramatically slowed within the industry. We've kept our start level at a consistent pace. And so as that labor frees up, that brings the cost of labor down. But also as the starts come down, that creates more availability of materials for the manufacturing production. So, material prices come down as well. That also tends to lag a little bit more behind labor because it's got a longer production cycle where labor is more immediate.

Our next question is from Alan Ratner from Zelman & Associates. Please go ahead.

Stuart, I'd love to drill in a little bit on your kind of industry-wide starts outlook for next year. My initial reaction when you kind of threw out down 30% was a little bit of a surprise. And I guess the way I'm thinking about it is, you guys are targeting a pretty flat pace for the year. Your largest competitor D.R. Horton has kind of articulated something similar. You guys are 25% of the single-family production market. There's been a lot of other builders that pulled back very sharply this year on starts as they were kind of clearing through some of the spec they built up in the spring. But if you have said we see the advantages of spec. We're going to ramp our start pace heading into the spring to kind of capitalize on that as well. So, I guess, my question is, how do you kind of arrive at that number? And let's say, for argument's sake, the decline is less than that, let's say, 10% or 20%. Does that impact your confidence on kind of getting the cost savings that you're clearly expecting for the year and the margin guidance that you gave as far as 1Q being the low watermark?

So first of all, Alan, I'd say that we could look at some of the larger builders, and I'm sure that they'll adjust their start pace and no one has fleeted the switch in industry, a lot of very smart participants. But there are some practical realities relative to smaller builders across the country. Remember, the larger builders are that we make a proportion. And the capital markets are complicated right now. It's not just a question of strategy for some. It's a question of what can you actually get started and how are the capital markets supporting it. I think that it might be only 10% or 20% or 30%. I don't know what the percentage is going to be. My personal view is that it looks like many of the smaller builders are really pulled back, the complication of price reductions and what's been paid for land and stuff like that. The other side of it, which makes up about a third of production is multifamily. And the multifamily capital markets are very frozen up right now. I think that the number of new communities coming out of the ground for multifamily and even the single-family for rent buyers are kind of seized up because of capital markets considerations. So, let's not even throw in strategy just from a capital market standpoint, it feels to me, can't prove that, a very sizable portion of starts for next year are going to be under limitation. Now, if it ends up being only 10% instead of 25%, still, you're looking at a housing shortage. I know that there are many with different opinions on this. I believe there's been a production shortage, housing shortage across the country. If you talk to mayors and governors across the country, their single biggest concern is workforce housing supply and affordability. It is a drumbeat that is in almost every major city and every state. And we feel that there is a shortage that is going to be compounded by the fact that there will be some production and reduction out of this and whether 10% or 35%, it's still going to be short supply, and I think a more limited downturn.

I appreciate the insight there, Stuart. Secondly, I think you kind of touched on it a little bit. You highlighted your can rate peaking in October, but just to kind of be more explicit. Can you just talk about what changes you have seen over the last 3, 4 weeks with the pullback in rates? Have you seen home buyer demand improving? And any pricing power coming back even or maybe a moderation in the need for additional incentives thus far in November and early December so far?

So, we've seen a combination of increased traffic, greater buyer demand, traffic increase, both on -- in the community level and on our website, definitely fewer cams, [ph] which we noted. And all of that has just been stabilizing the environment, hasn’t quite led to higher pricing yet, but those are generally happened before you gain some sort of pricing power accounts.

And just to be clear, that is incorporated in your 1Q order guidance of down 15% to I think 25 or so percent that incorporates...

Yes. That's the range that we're expecting at this point in time.

Our final question comes from Mike Rehaut from JPMorgan. Please go ahead.

First question, just wanted to be clear. I am sorry if I'm not fully grasping elements of the guidance or comments. But on your view around or outlook around first quarter gross margins being the lowest of the year and improving from there on in. Just wanted to be clear that -- or perhaps you could articulate a little bit what type of view on price or pricing trends over the next 6 to 9 months does that incorporate? Because certainly, it appears that it's incorporating some amount of cost relief, I guess, as you're going into the back half. I'd be curious how much of a basis point standpoint the cost relief is. But more importantly, what type of view on price does that outlook for gross margins throughout fiscal '23 reflect?

So from a price ASP standpoint, we're not assuming any appreciation in the market. That's what our underwriting is at. That's what we see out there. To the extent that there's price appreciation or we're able to increase our ASP, what we do with incentives and there's a benefit in the financing market, that's just incremental upside to what we view will happen in 2023.

Just to emphasize Rick's point, Michael, if you think about mortgage rate buydowns is really being a very effective tool in making sales in this environment. To the extent that rates come in, the cost of that buy down becomes less expensive and you could see probably potentially the biggest benefit from that if that come in.

So just to be clear then, you're not baking in, obviously, any price appreciation. But on the flip side, you're not baking in any further softening in pricing trends from here on in as well in terms of additional incentives or price discounts needed if the market continues to slip from here?

That's correct. So, we're assuming no price appreciation, no incremental price reductions. We think that the incentives that we've been offering are good, solid incentives and base prices in order to attract the volume. I think you can see that in the numbers that we've been generating. The margin upside throughout the year as we noted Q1 is going to be the low point. It’s really going to come from several things. One, Jon went through the cost side, Jon went through the cycle time, Stuart talked about land and we're going to continue to value engineer product to the extent that we need to.

And to the extent that prices curtail a bit more, some of the embedded cost savings are going to be offsets to that. But I think that we've gotten ahead of where prices have been going. And so, we're looking at kind of a level field right now.

Okay. No, I appreciate that. And I guess just secondly, any thoughts around community count growth as the year progresses? I know obviously, there's been movement on the lot side and walking away from different amounts of lots on the option side. But oftentimes that might impact one or two years out. So, any thoughts around where the community count might be by year-end '23 versus '22?

So we rather not talk about community count right now because it's a very moving picture. You might expect since we’ve renegotiated, repositioned deals that community count could or should grow in the back half of '23. But I think right now, it's just too soon to give any guidance as to what those numbers would be.

Okay. Thank you, Mike, and thank you, everyone, for joining us. I know that we went on a little longer than normal, but these are complicated times. It's been a complicated year-end and we wanted to give a lot of detail. Look forward to reporting back in our first quarter. And if you have further questions, give us a call. Thank you, everyone.

That concludes today's conference. Thank you all for participating.