Taylor Morrison Home - Earnings Call - Q3 2018
October 31, 2018
Transcript
Operator (participant)
Good morning and welcome to Taylor Morrison's third quarter 2018 earnings conference call. 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 Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.
Jason Lenderman (VP of Investor Relations and Treasury)
Thank you and welcome, everyone, to Taylor Morrison's third quarter 2018 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer, and Dave Cone, Executive Vice President and Chief Financial Officer. Please note there is a presentation posted to our Investor Relations website that is referenced throughout the prepared remarks. You can access that presentation by clicking into the Events tab and searching under the Upcoming Events section. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results along with our guidance. Then Sheryl will conclude with the outlook for the business, after which we'll be happy to take your questions.
Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session, includes forward-looking statements that are subject to the Safe Harbor Statement for forward-looking information that you'll find in today's news release. 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 Securities and Exchange Commission, and we do not undertake any obligation to update our forward-looking statements. Now, let me turn the call over to Sheryl Palmer.
Sheryl Palmer (Chairman and CEO)
Thank you, Jason, and thank you, everyone, for joining us this morning. We are eager to share with you our third quarter results, our views on the current environment, and provide an update on our recently completed acquisition of AV Homes. Getting right to our results, once again, we delivered or exceeded on all points of guidance, which is a direct reflection of our team's effort and focus on driving shareholder value. Looking at page three of our earnings presentation, you'll see a summary of our results focused on our key metrics. For the quarter, we closed 2,115 homes, which is a 15% increase over the same period in the prior year. All regions saw year-over-year increases, with the East region up the most at 23%, followed by the Central and West, which were up 12% and 6%, respectively.
Sales for the quarter were up year-over-year to 1,822, despite a lower average community count of 275, driven by a higher sales pace of 2.2. Based on our October pace, we are still on track to deliver on our full-year guidance and expect it to be around 2.4. Our performance in the third quarter drove an EBT margin of 9.7%, which was a sequential improvement of 160 basis points higher than in our second quarter and 100 basis points higher than this time last year. That led to $0.83 of diluted EPS, an increase of $0.38 compared to the third quarter of 2017. The sales environment has been a topic of interest this earnings cycle, and I'd like to offer our opinion on what's happening through the lens of what we're seeing in the field. We believe there are a few different factors at play.
First, we believe we're experiencing some normal seasonality, where we typically see the population of interested buyers decrease from its spring selling season peak. In fact, the change we saw through the third quarter mirrored our 2017 sales pattern, and it's important to note each period in the quarter exceeded each period from the prior year. Our sales pace guidance reflected this pattern, as the front half was expected to be higher than the back half. The second driver of lower trending sales is something we don't believe can be explained by seasonality. There does appear to be more of a pause taking place as some buyers have taken a step back to reassess the thought of a new home purchase.
Our consumer research indicates the reasons are vast and likely include the psychology around interest rate creep and affordability, including a significant impact of most households enjoying historically low mortgage rates, some likely pull forward from the spring selling season, and a bit of a wait-and-see approach. It's also possible the midterms are creating some level of anxiety, and the constant media rhetoric around interest rates probably isn't helpful. As we think about these various reasons, we believe we can't ignore the seasonality impact combined with the consumer trying to digest all the conflicting data that they're being faced with. Having said that, we do see a positive play, with each consumer cohort behaving a bit differently, and if history repeats itself, hopefully we see that change over the coming months as the next many weeks and the spring selling season will be critical to set the stage for 2019.
In terms of this recent pause or moderation, I think it's very important that we also consider it as a smaller part of the larger cycle. In most cycles, including this protracted one, we experience different points of fits and starts. Nobody knows if this is different from the other times or if it's signaling something more systemic, but when I look at the data, I'd suggest this is another example of a pause, not a stop. The widely recognized level of single-family housing starts needed to serve the U.S. population is said to be, on average, 1.5 million per year. The last time we reached that level was 2006.
If we calculate the starts deficit by considering each year we didn't reach that level, while controlling for the years in which we may have been overbuilding in the early 2000s, then the math would suggest we're still roughly 4.5 million housing starts in the hole. Further to that point, it will take us many years to reduce this deficit, even if we assume higher volume output from this point forward. Of course, there are counterarguments to this simple deficit math, but I think the conceptual point is valid. This country has underbuilt for more than 10 years, and this deficit will sustain an undercurrent of demand that can continue to fuel us forward. So what could curtail this pent-up demand? Rates and resulting affordability are the reasons most often cited today.
And while current rates have moved up about 100 basis points since the end of 2017, they're still historically low. We recognize a part of this for some consumer groups is probably every bit emotional as it is perceived financially limiting. Has affordability tightened? Yes. Is it at a level that prevents all families from buying homes if they so choose? Simple answer is no. The good news is the desire to purchase is still strong across all price points, but certainly these interest rate increases will most impact the true entry-level consumer who is stretching their way into homeownership, as the current affordability index from the National Association of Realtors sits in the high 130s. That means the average family is generating more than 130% of the necessary income to afford a typical home. That's hardly at a level preventing families from making home purchases.
The average fixed 30-year mortgage rate over the last 40 years has been around 8%. Currently, we're operating in an environment right around 5% and about 40% off that historical average. Again, still at very low levels. To be fair, we've often said that it's not the rate per se that drives behavior as much as the speed in which it moves. In addition to that, while rate levels inundate the news cycle, it's really the resulting payment that affects many buyers, and that's where most of their sensitivity lies. As I've mentioned before, our internal data supports the current levels of the affordability index, and in fact, our data suggests that a Taylor Morrison buyer is more secure than the average buyer reflected in the affordability index.
Our conventional loan buyer still has more than 500 basis points of room in their interest rate, and our FHA buyers have about 300 basis points for their currently contracted home before they would be faced with qualifying constraints. What does it mean then that demand is still underserved and has been for some time, or that rates are still low but have moved aggressively in the last 12 months and more than we've seen in years, or that the affordability index suggests that there is still room for buyers? We believe that when all the data is being considered, it suggests the actual underpinnings of our industry support additional runway in the current cycle. We do acknowledge there's a lot of information for the consumer to process, and the negative headlines related to home buying could add to their apprehension.
In fact, let me read you a few headlines that have had that effect. The ripple effect of housing's fading rebound. More homes are beyond reach of middle class. Rising home prices and interest rates have chipped away at affordability over the past year. Home builders offer freebies as booming U.S. markets cool. Regulatory issues hurting the housing market. Millennials holding back housing recovery. I'm sure they all sound familiar. The funny thing is they're all from 2014. So with all things being equal, this too shall pass and we'll work our way through this next inflection point similar to 2014, and once again, hopefully find ourselves on the path of this protracted recovery. Now I want to turn my attention to our recent acquisition of AV Homes.
On October 2nd, we announced the closing of the acquisition, the timing being consistent with what we shared in early June when we announced our intent to acquire. From that point until the deal closed, both teams worked at an accelerated pace to put us in the best position for a smooth transition. So far, the integration is further along than I could have hoped at this point, and I'm very pleased with our progress. As part of our preparation, we created an Integration Management Office that is being led by two of our most seasoned leaders, both of whom were heavily involved in the negotiation of the deal as well as the process of underwriting in it for our due diligence.
Dave will discuss the financial impact along with certain guided metrics in his remarks, so I want to take this time to reiterate our excitement about the addition of AV Homes and the rationale around the timing of the transaction. We believe the merits of most deals are largely defined by the price. Of course, you have to have strategic alignment and execute once you've made the purchase, but in order to create a framework for future success, you have to acquire at the right price. Frankly, our discipline around this tenet has prevented us from pursuing other deals, but that's okay. We're first interested in acquiring to enhance our strategy in the short and long term, and it has to be for the right price. AV Homes checked each of these boxes for us.
If you turn to page four of the presentation, you'll see some of the highlights of the transaction. The terms of the deal at closing equated to us paying about one times book. We're very pleased with that purchase multiple and believe it to be the right deal at the right price at the right time. On a pro forma basis, the combined company would generate around $5 billion in revenue this year with a portfolio of approximately 59,000 owned and controlled lots. The acquisition allowed us to expand our consumer offering while going deeper in existing markets and, as a result, offer tangible synergy opportunities. In summary, and even with the current sales environment, we have confidence in the deal and the long-term strategic benefits. Before I turn the call over to Dave, let me reiterate our perspective on our current environment.
Consumer confidence continues to be very healthy, in fact, not far off the all-time high with regular sequential improvements, and that is further supported by the expectations index also experiencing recent increases. This speaks to the overall business environment and strong employment levels. The unemployment rate is below 4%, one of the lowest rates in decades, and considered full employment for the country's workforce. And lastly, the average person's balance sheet continues to strengthen while income growth is now starting to find traction. The last few years have shown us that in a number of markets, we don't know what a new normal looks like, as many have gone through some version of a reset. I don't think anyone realistically assumed it would be a completely smooth march back to normalized levels, but rather one that exhibits both occasional ups and downs.
So it seems too early to suggest what's happening now is something bigger. We are, though, seeing new home inventory levels rise, and the industry needs to stay mindful of that, but the metrics that drive our industry are still healthy. Our country's economy is strong, and homeownership remains a goal of many Americans. We do believe a quick change in any macro condition, like interest rates, requires an adjustment for the consumer. We'll continue to prepare the company and be ready to meet the needs of our customers. Now, Dave, we'll walk you through the financials.
Dave Cone (EVP and CFO)
Thanks, Sheryl, and hello everyone. A summary of our financial results for the quarter can be found on page five of the presentation. For the quarter, net income was $94 million, and diluted earnings per share was $0.83.
Total revenues were just over $1 billion for the quarter, including homebuilding revenues of $1 billion. Home closings gross margin, inclusive of capitalized interest, was 18.9% and on the upper end of our expectations. This represents a 90 basis point improvement on a sequential basis and a 30 basis point improvement when compared to the same time last year. We experienced geographic mix shifts into some of our higher rate divisions, such as Phoenix and the Bay Area, and out of lower rate divisions, such as Southern California. Within divisions, we also experienced some product shifts and higher margin deliveries. We did experience some anticipated cost pressures in materials relative to last year. However, we fortunately saw commensurate or better pricing power in many of our communities helping to offset those cost pressures.
On a total gross margin basis for the quarter, we came in at 19.2%, which was a 100 basis point improvement on a sequential basis and a 30 basis point improvement when compared to the same time last year. This was driven by both high margin land sales and financial services. Moving to financial services, we generated more than $17 million in revenue for the quarter and just under 40% in margin for that business. Our mortgage company capture rate came in at 71%, or 100 basis point improvement sequentially. SG&A as a percentage of home closings revenue came in at 9.9%, which was a decrease of about 80 basis points from the prior year's quarter and about a 60 basis point decrease from the second quarter of this year. In both instances, the improvement was driven by top-line leverage.
The costs associated with the acquisition that ran through our financials in the third quarter were not material. The majority of these expenses will occur in the fourth quarter, and I will provide more detail on this as we discuss our Q4 guidance. Our earnings before income taxes were $101 million, or 9.7% of revenue. Income taxes totaled about $6 million for the quarter, representing an effective rate of 6.4%. This was driven by a number of one-time tax reductions, including accelerated deductions following an inventory analysis, a favorable conclusion on a state tax audit, and utilization of foreign tax credits relating to the deemed repatriation of foreign earnings mandated by tax reform. Controlling for these one-time reductions, our pro forma effective rate would have been 25.4%. For the quarter, we spent roughly $282 million in land purchases and development.
At the end of the quarter, we had approximately 42,000 lots owned and controlled. Our percent controlled has been increasing over the past several years as we seek out more favorable deal structures. The percentage of lots owned was about 67%, with the remainder under control. Compared to the third quarter of last year, this ratio has moved by over 100 basis points in favor of controlled lots. On average, our land bank had approximately five years of supply at quarter end based on a trailing 12 months of closings. On a pro forma basis, at the end of the third quarter, the combined company of Taylor Morrison and AV Homes had about 59,000 total lots, equating to around 5.5 years of supply. At the end of the quarter, we had 4,449 units in our backlog with a sales value of more than $2.3 billion.
Compared to the same time last year, this represents an increase of 2% in units and an increase of 10% in sales value for those units. In addition, we had 1,619 total specs, which includes 247 finished specs. On a per-community basis, we had just under six total specs and less than one finished spec per community. Being good stewards of our balance sheet is extremely important to us, and our inventory management efforts continue to be an encouraging indicator. This has led to consistent sequential improvement in our inventory and asset turns. For the third quarter, our inventory turns increased 8% year-over-year, and our asset turns were up 7% using the same comparison. We've now driven year-over-year accretion in both these metrics for eight consecutive quarters.
We ended the quarter with about $383 million in cash, and our net debt-to-capital ratio was 30.4%, which we believe is one of the lowest in the industry. This ratio has increased as we closed the AV acquisition, but it will remain well within a healthy range in the high 30s% to low 40s%. All things being equal, following the AV transaction, we'd expect this ratio to decrease through normal course of business. Our balance sheet continues to be a point of significant strength and a tool that provides flexibility while executing on our capital allocation and growth strategies. Our optimized platform in the areas of finance and capital allocation has allowed us to pursue a multifaceted strategy in how we use our cash. In 2018, we started the year by buying back $200 million in stock.
Then we turned our attention to the acquisition and now have refocused on our effort on buying back stock. As of yesterday, we've purchased just about 3 million shares for $48 million since the close of the AV transaction on October 2nd. The remaining balance on our authorization is $48 million, and it will expire at the end of this year. We will continue to assess the use of share repurchases to optimize ROE and seek a new authorization if appropriate. As you know, our capital allocation philosophy is focused on four pillars. First, organically reinvesting in the business to maintain a viable land pipeline. Second, seek additional growth opportunities through M&A. Third, utilize our debt leverage. And finally, returning excess cash to shareholders.
We have executed on each pillar in 2018, as we have largely done over the last several years, furthering efforts to enhance our ability to drive long-term shareholder return. Before I get to our fourth quarter guidance, I'd like to take a minute to discuss the recent corporate structure reorganization we announced earlier this month. An illustration of the pre-reorg and post-reorg entity structure of the company can be found on page six of the presentation. The intent of the reorganization was to simplify our capital and tax structure and to eliminate the dual share class. There were two larger pieces to this project. One was tied to the dual class share structure, and the other relates to final repatriated proceeds from the sale of our Monarch business in Canada.
All told, the reorganization created a new holding company while allowing us to begin to eliminate some of our pre-existing intermediate entities. The new holding company has assumed our existing name, Taylor Morrison Home Corporation, and our ticker symbol will not change. As a part of this process, we've eliminated our dual share class structure and the minority interest in our principal subsidiary by effectively swapping out those interests and the paired Class B shares for Class A shares, which also means this does not have any impact on our share count. There will be two expenses that hit our income statement as a result of these changes, with one of those being a cash event. Let's turn to page seven of the presentation, and I'll cover this in our guidance. Let's begin with some details related to the AV acquisition.
We're reaffirming our synergy guidance of $30 million on an annualized basis. The one-time expenses that will run through our income statement in the fourth quarter are estimated to be under $30 million, with some remaining amount that will hit at the beginning of 2019. All guided metrics I'm going to review are for the combined business. For the fourth quarter, we anticipate about 3,125 home closings. Our average community count will be approximately 330. GAAP home closings margin, inclusive of capitalized interest and purchase accounting, will be in the mid 16% range, and our SG&A as a percentage of homebuilding revenue is expected to be in the low to mid 9% range. Our effective tax rate, inclusive of one-time expenses, will be between 42% and 44%, and when excluding those one-time expenses, that rate will be between 23 and 25%.
As I alluded to previously, let me highlight two charges on the P&L in the fourth quarter related to the portion of our corporate reorganization related to the Canadian repatriation for a total of about $36 million. $20 million will be in the other expense line and is a non-cash event, and the other approximately $16 million charge will be in the tax expense line, which is factored into the rate guidance and is a cash event. I'll now turn the call back over to Sheryl.
Sheryl Palmer (Chairman and CEO)
Thank you, Dave. I've made it a point the last few quarters to share specific findings from our internal customer research, and I'm hopeful that it's offered you a different perspective as you think about our business.
Today, I'd like to share a quick update on the research we discussed earlier this summer as it relates to the differences in demand with differing buyer groups. But first, let me reiterate and review our good fortune of attracting buyers that have a strong financial profile, as that will provide the necessary backdrop for the discussion. On average, our borrowers have solid credit and personal balance sheets, a loan-to-value of 76%, with a debt-to-income ratio of 38% on a loan amount of approximately $346,000. Over the last 15 quarters, our average borrower profile has a credit score of 740 or higher, and in the third quarter, that number was approaching 750. Our strong buyer profile is no doubt influenced by our mix of professional first-time buyers, move-up, and active adult customers, which also strongly correlates to our high cash business, which was nearly 20% for the quarter.
Now, let me share some of the subtle changes we saw in the shopper research we collected and compare to the Q2 data last provided. The first question centered around the buyer's desire to spend more or less than what they could qualify for. And as expected, there were slight movements as the number of shoppers willing to spend more than they qualify for went down by about 20%, and the number of shoppers wanting to spend less than they are qualified for went up by about the same amount. What I found most interesting was the interest rate sensitivity question, with a higher number of shoppers suggesting greater tolerances to rates as high as 7%-7.5%. It seems to suggest that there is something like a 200 basis points ceiling from current rates as the consumer processes the changes.
The last piece of data we're sharing shows the most affordable buyers have more urgency at today's rates, given concerns of being priced out of the market with future increases, and the 55 or better buyer continues to be least impacted by any rate changes. So let me conclude by repeating what I mentioned earlier in my remarks and how we couldn't be more excited that the Taylor Morrison and AV teams are finally together, and we can begin our journey as a united front. We came into the year with lofty goals tied to each of our strategic priorities: operational excellence, strategic growth, and the customer experience, and I'm pleased to say that we're on track to deliver on each of these focus areas. Overall, I'm encouraged by the possibilities of our industry and macroeconomy at large.
We'll continue to monitor these things very closely, as I know you will too, and if things change and our perspective shifts, we'll be out in front of that message. With that, I'd like to open the call to questions. Operator, please provide our participants with instructions.
Operator (participant)
Thank you. Ladies and gentlemen, at this time, if you do have a question, please press the star and the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Stephen East of Wells Fargo. Your line is open.
Stephen East (Managing Director)
Thank you, and good morning, Sheryl and David. Congratulations on closing AV. Thank you. If you look at the synergies from it, what's your timeline for that $30 million? When do you think you'll be at that run rate?
And if you could help us out on where the buckets are, and do you see any other issues that could cause you to either fall short of that or to exceed that as you look forward?
Dave Cone (EVP and CFO)
Yeah. Good morning, Stephen. This is Dave. So on the synergies, we set about $30 million, and I'd say that in the second half of 2019, we'll be on kind of that annualized run rate to deliver that $30 million. Then obviously, you get the full impact of that in 2020. So it's going to ramp up as we move through between now and the first half of 2019. The breakdown, when you look at it, about two-thirds of that is coming from SG&A savings, and the other third is a mix of rebates, mortgage insurance, kind of rounding that out.
The one thing that we've mentioned in the past is we also have some potential for construction efficiencies, which will come through the integration. So I think to your question, that $30 million, we're confident we can deliver on that. We actually are hopeful that we can maybe even inch that up a little bit higher through some other construction efficiencies.
Stephen East (Managing Director)
Gotcha. Okay. And then, Sheryl, I agree pretty much as we walk these markets, I agree with what you all are talking about, what your consumers, the way they're acting, etc. Are there any markets, though, that you see true affordability issues versus what I just called sticker shock? And if so, how are you all handling those from an incentive perspective, whether it's rate buydowns, something else? And if this slowdown lasts into the spring, what do you do differently than maybe what you're trying to do today?
Sheryl Palmer (Chairman and CEO)
Hi, Stephen. Yeah. Let me try to hit each of those. So I think we've been talking about the markets where we've seen kind of the rate of pace on year-over-year and quarter-over-quarter increases move to levels that I think we've been uncomfortable with. And I would tell you that's primarily Southern Cal, the Bay, Dallas. Dallas, I mean, Denver, interestingly enough, has also had a very significant pace on price appreciation, but we haven't seen the same consumer reaction in Denver as we have in what I would say are the California markets. And Dallas, we've been talking about that now for, gosh, probably two years, Stephen. When I think about incentives, you look at a market like even an affordable community in Southern California where maybe a year ago the price was $500,000.
Today, when you take the combination of that price appreciation, 6%-8% in 12 months, and the change of interest rates, it is sticker shock for the consumer. I mean, that mortgage payment, with all other things being equal, could be up 20%-25%, so what we're really doing with the incentives is obviously, as we started to really feel the pace of mortgage interest rates moving, we made, I think, a strategic decision at the field level to make sure we aligned our incentives with the specific needs of the buyers, and as you can imagine, they're all very different. Some need help in closing costs, some need help with the lower rates, so we'll use it for a buydown, some maybe an extended lock.
So it's a little bit different, but what we have is the flexibility within those communities to work with the individual customer needs. As I look forward, I think we need to see. I mean, we'll continue to use the incentive dollars. When you just want to talk about the sales floor incentives, I think more importantly, it's really making sure that we use the time to help our customers understand what they have. We pre-qualify our buyers, obviously, before we get them into contract, and that's been really important for us. But I think in today's environment, it's so easy just to jump to interest rate. And what we really have to do is make sure our sales team and our loan consultants are properly trained to talk to the customer. The natural tendency is just to go right to rates.
But like I said in my prepared comments, the real issue is payment. So we need to walk them through the numbers. Don't lead with the interest rate. Help them understand what they can afford. Because like I said, on average, they have somewhere between three and five hundred basis points of room before they're priced out.
Dave Cone (EVP and CFO)
And I'll just throw in a couple other things there. What we typically see sequentially from Q3 to Q4, the incentive rate does pick up. That's been the case for every year for the last several years. So nothing too unusual about that. And as Sheryl mentioned, it's based on community and consumer specific. But also for the year, we're projecting our incentives to be roughly flat to last year. So recognizing the sales environment and the incentives needed, we think they're going to be flat, and that's built into our guidance.
Stephen East (Managing Director)
All right. Thank you.
Sheryl Palmer (Chairman and CEO)
Thank you, Stephen.
Operator (participant)
Thank you. And our next question comes from the line of Michael Rehaut of JPMorgan. Your line is open.
Maggie Wellborn (Equity Research Analyst)
Hi. This is actually Maggie Wellborn on for Mike. I guess first, you talked a little bit about your capital allocation strategy and how following the AV closing, you kind of have shifted back to share repurchase. But I guess what I'm wondering is, how are you thinking about M&A over the next two to three years? And do you still have an appetite to expand your footprint by potentially taking advantage of other builders, trading at attractive price-to-book multiples?
Sheryl Palmer (Chairman and CEO)
What I would tell you about let me just hit the M&A thing, and then David, if you want to throw anything on the capital allocation.
But what I would tell you about M&A, Maggie, is we're not even 30 days into the closing of AV. So it's really important that we digest that first. We have a lot of work to do. We've done a lot of good work to get us here. But across the market, we have a lot of work to integrate and get this thing humming where we all want it. So when I look at future M&A, it's hard to imagine right now that there's really any better investment than buying back our stock. And I think you heard Dave in his prepared comment talk about the feverishness that we've been buying back since the day we could after the closing because the team put the 10b5-1 in place to allow us to do that. So I think that's where we are for now. But certainly, are we always looking?
I would tell you the same thing we've always said: it's best use of cash. We'll continue to evaluate the markets, look at the opportunity for greater depth in some of our other markets, and always look at new ones. But right now, the focus is really digesting what we have. Anything, David?
Dave Cone (EVP and CFO)
Yeah. And lastly, I think, Maggie, it goes back to the way we built our balance sheet. We really built that to be a platform for us to give us optionality. So everything that Sheryl said, this is going to allow us to pivot based on market conditions. If you look at this year, we're able to do the AV transaction, actually just go out and get some short-term borrowings to help fund the transaction, which will pay off next year. But we still have the ability to buy back stock. We bought back about 3 million.
We have 48 million left on our authorization. That's 3 million shares, 48 million left on our authorization. And given where the stock's trading, you can probably expect us to exhaust that by the end of this year.
Maggie Wellborn (Equity Research Analyst)
Okay. Thank you. And then next question, as far as regional demand trends go, you talked a little bit about the geographic mix shift with margins and incentives and all of that. But can you give any color to how sales pace progressed through the quarters, maybe across the different markets? Did any particular ones weaken?
Sheryl Palmer (Chairman and CEO)
Yeah. I think as we look, I'll resist going to a market-by-market recap for you, Maggie. But I think as we look across the markets, as I said in the comments, when I look at just the East in total, what we really had going on there was a reduction in community count.
Paces were up, but just total orders were down, but that was community count driven. When I look across the West, we were generally flat. We were up on sales, slightly up on community count, and flat on sales pace. As we look through the quarter, it was really the Bay that we probably started feeling the pressure first and then followed by Southern Cal. But Phoenix and Denver continued to stay very, very strong. When I look at Central, community count was generally flat. Units were up. Pace was up. So you almost have to go market-by-market, but it was a pretty good mix.
Maggie Wellborn (Equity Research Analyst)
Okay. Thank you.
Sheryl Palmer (Chairman and CEO)
You bet.
Operator (participant)
Thank you. And our next question is from the line of Ivy Zelman of Zelman & Associates. Your line is open.
Ivy Zelman (EVP and Co-Founder)
Thank you. Good morning. Nice quarter, guys. And congrats on the AV closing.
Sheryl Palmer (Chairman and CEO)
Thanks, Ivy.
Ivy Zelman (EVP and Co-Founder)
Sheryl, your opening comments are really the best in the space. You really provide so much insight, and it's extremely helpful. One of the things about the market on a big picture basis that I think is hard for people to read the tea leaves is the fact that rates have been headed downward for over 30 years. And we now have a situation where a lot of people that live in existing homes are at a variable rate. And I think it's something like 80% of the lower-than-5% mortgage.
So when you think about your buyers and you're more skewed to the move-up, what do you think if rates continue to move higher, that being an impediment because people have not only a higher home price that they arguably would have to pay up to buy a home, a second-time move-up or first-time move-up, and now they also have a higher monthly payment? So thinking about history, have you looked back in prior periods where I know, for example, rates shot up into the tech crash prior to the recession and then came back down? Is there anything that you've looked at historically that could glean some help around the risk that people just stay in their homes and age in place because it's just more expensive for them?
Sheryl Palmer (Chairman and CEO)
Yeah. Good question, Ivy. As you might imagine, we've done a fair deep dive.
We've got just an amazing research team here, and we continue to talk to shoppers, buyers, and look historically at the trends. So you're right. I think one of the things that has been underestimated or expected on this hesitation is that 75%-85% of buyers that are sitting there either in a new home or a refinanced home with a rate that's somewhere in the low to high threes. And that's why I made the comment about that 200 basis points in my prepared comments because all the research that we're doing suggests because it's moved. It's moved from when we did it earlier in the year. It's moved from when we've done it mid-year. And what continues to be consistent is that it's about 200 basis points from where rates are trading that the buyers seem to articulate what will make them a little bit more uneasy.
Now, I acknowledge that our buyers are going to be different than maybe somebody else's portfolio of buyers because this is a shopper survey. But then when I look historically, you see that when rates have shot up, and this is really over the last number of decades, when rates have shot up, there's anywhere between a two- and six-quarter hesitation. What we don't know because we really don't have good history on them coming from such a historical low is how quick do buyers adjust this time. We saw it back a couple of years ago, and we saw it last a couple of quarters.
The last thing I'd give you, Ivy, is when we really take a deep dive into the data and talk to our shoppers and really understand, in the last quarter, we've actually seen fewer people or actually, excuse me, I would say flat percentage of folks saying that they've had a concern in interest rates. I talked already about the fact that they might reduce what they're buying, and where we are seeing the pressure is in that most affordable buyer. Those are the folks today that I think it supports the number. Why we've seen units and household formation pick up with the most affordable buyer is because they're racing out to market because they're going to get to a point where they will get priced out.
But when I look at the bulk, our active adults, the move-up, I think for them it's more of a hesitation, and they need a catalyst. They need a catalyst because they have a home. They don't have to move tomorrow.
Dave Cone (EVP and CFO)
But they are well-qualified buyers. I mean, we continually run our credit scores for buyers, are typically in the 740s, and it's held that way now for several years.
Sheryl Palmer (Chairman and CEO)
Yeah. I hope that's helpful, Ivy.
Ivy Zelman (EVP and Co-Founder)
So when you look at the performance in the quarter, no, it does. When you look at the performance in the quarter and breaking out the segments, and I apologize. I've been listening. I don't think you've said this. The rate of absorption by buyer segment, if you see a difference with how you just commented with respect to the affordable segment, there's more of an urgency. Is that outperforming?
And if so, remind us all what percent is first time for you officially? And then I had a quick one for you, Dave. You mentioned incentives. You expect to be flat. That's for this year. Is that correct? You weren't referring to 2019.
Dave Cone (EVP and CFO)
No, that was for the rest of this year, Ivy.
Ivy Zelman (EVP and Co-Founder)
Right. So I have another one if you allow me, but if you want to just take that first one, please. I'd appreciate it.
Sheryl Palmer (Chairman and CEO)
Okay. You bet, Ivy. The way I've looked at it and really tried to dive into the information has been both geographic and by consumer as compared to a roll-up because I think the roll-ups are not. I think they're slightly misleading because I have some markets where that first-time buyer is actually where we've seen the greatest number of cancellations, and it's because they're not qualifying.
I have some markets where the cans have actually been at the higher end, and the primary reason for those cancellations, and I would say net sales rate by consumer group, Ivy, is because they can't sell the house that they have today. And so I wouldn't simplify it by saying that there's this trend in first-timers where we're seeing build-up of inventory in many of our markets is around the fringe, and that would lead to the assumption that people are seeing more cans. As you know, we've really tried to stay core. We've certainly dipped our toe in some of the peripheral markets, but we're not in there heavy. So I wouldn't default to just consumer group. It's very geographic specific and then consumer group.
Ivy Zelman (EVP and Co-Founder)
Got it. Understood. Can I sneak another one in real quick?
Sheryl Palmer (Chairman and CEO)
Don't worry.
Ivy Zelman (EVP and Co-Founder)
Just on incentives, recognizing that you guys have been really a good actor, more prudent, focusing more on profitability. But I think the builders are starting to step on the gas, and this time of year, it's likely to always increase, but it's above normal, and we think that'll only accelerate. So do you hold the line? Do you draw the line and continue to take that more prudent strategy, or do you feel at some point you'd have to follow the market at risk of sitting on inventory that you want to monetize? How do you think about it on a go-forward basis?
Sheryl Palmer (Chairman and CEO)
Yeah. You're going to hate my answer only because it's not a default, but I'd love to sit here and say we're going to hold the line, but that wouldn't be completely honest. We have to make those decisions in each community.
When we look at what's happening, you are right. There's a lot of pressure around year-end closings. There's a lot of inventory that's under production right now for year-end closings, and I think there's two things going on. I think you've seen an acceleration in cancellations, so some of that pressure is because there's more inventory than maybe people had planned on because they were building to a pace that then moderated. The good news around it so far is that most of what you would say you described as being a little crazy tends to be following year-end closings. That's a pattern we see every fourth quarter. So yeah, has it accelerated a little bit? It has because people want to be responsible with what they have on a finished inventory going into the new year, so we're holding steady where it makes sense.
We have to look at the volume of inventory we have. We have to look at the volume of inventory that competition has and the run rate of that. So it's a very community-by-community decision. But as Dave articulated, I still think as we look at the year, our incentives will be down for the year.
Dave Cone (EVP and CFO)
Probably flattish year-on-year, yeah.
Sheryl Palmer (Chairman and CEO)
I'm sorry. For the quarter, probably more likely.
Dave Cone (EVP and CFO)
Yeah.
Sheryl Palmer (Chairman and CEO)
Yeah.
Ivy Zelman (EVP and Co-Founder)
Okay, guys. Good luck. Thank you.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Jack Micenko of SIG. Your line is open.
Soham Bhonsle (Equity Research Associate of U.S. Housing and Financials)
Hey, good morning, guys. This is actually Soham Bhonsle for Jack this morning. So my first question was on your land pipeline. So you held your land and development spend for the year at the $1.1 billion, even with AV coming on. So should we take that to mean that you're looking to take your pipeline down from the 5.5 today, or is that just a timing issue for the quarter?
Dave Cone (EVP and CFO)
Oh, that's as much timing, I think, than anything. We're obviously looking at just the land market right now, and with the softness, that doesn't really change our approach. We believe it's somewhat short-term. We always talk about we don't necessarily make long-term decisions on short-term market conditions. But some of this is also just digesting the AV transaction. So the 1.1, we think, gives us enough in the pipeline to go forward. We really have everything we need for 2019, and this is kind of building more for 2020.
Soham Bhonsle (Equity Research Associate of U.S. Housing and Financials)
Is there sort of a target that you guys have discussed about with AV, just the faster-turning product coming on now? Is there a target you guys have internally?
Sheryl Palmer (Chairman and CEO)
As far as target on?
Soham Bhonsle (Equity Research Associate of U.S. Housing and Financials)
On land. Years of land.
Sheryl Palmer (Chairman and CEO)
Yeah. I'd be really careful there. As Dave said, we don't even put targets because we tend to be very opportunistic. Like I would tell you, in some markets today, we are seeing land deals that we might have lost come back our way. So what happens when sales moderate is the land market changes. What we're not seeing yet is sellers really kind of change their position on the value of what they own, but it would be difficult today for us to put a target on it. You've seen us work our land pipeline down over the last few years, and you've seen us move the structure of the pipeline as well, so I'd rather us look at it that way and say there are some markets we're going to continue to operate a little shorter.
I think with their book of business, some of it's these larger master plans active adult that will be a little larger, but that's offset by some of their more first-time business, which we'll move through quicker. So it's a long way of saying I don't expect it to be very different than what you've seen with us around the five years, but give us a couple of quarters, and I think we'll have a greater perspective on that.
Soham Bhonsle (Equity Research Associate of U.S. Housing and Financials)
Okay. That's fair. And then in terms of funding the acquisition, which shares trading where they're today, how are you guys thinking about the mix of cash on hand versus debt and equity? I think on the June call, you spoke about a 60/40 cash equity mix.
Dave Cone (EVP and CFO)
Yeah. I mean, well, we finalized all that, and I think when you look at where the shares traded, it actually ended up being a little bit more like 70/30 when it was all said and done. And we had the $80 million converts that were part of the deal. All those bondholders opted to convert to cash, so that component is gone as well.
Soham Bhonsle (Equity Research Associate of U.S. Housing and Financials)
Okay. And then just quickly on delivery guidance for fourth quarter, does that contemplate any impact from the hurricanes in the quarter?
Dave Cone (EVP and CFO)
Yeah. It does. It includes a couple of things. Obviously, the recent softness that we're seeing across the industry, that's impacting our ability to sell and close homes in the fourth quarter. And when that softness happens in the back half of the year, it's hard to make up all those closings.
Weather is also playing a factor in places such as Texas and Florida. We had a tremendous amount of rain in Texas and then obviously hurricanes out east. So there wasn't any one event, I would say, that drove it. This is more a culmination of events that did have an impact on kind of both the sales side and the production side.
Sheryl Palmer (Chairman and CEO)
And I might even give it a specific call out because you're right. The current hurricanes had an impact because we were closed for maybe 10 days in the Carolinas. But I think the thing that's underappreciated, honestly, and it sounds like whining, and I don't mean to, is the impact of the hurricanes from last year on labor this year. We've really seen that in Florida specifically. I mean, for example, roofers, I mean, having to build houses out of sequence.
So even the lasting effect, we actually have had more of a challenge with labor this quarter and last quarter than we did last year post-hurricane.
Soham Bhonsle (Equity Research Associate of U.S. Housing and Financials)
Okay. Great. Thank you.
Dave Cone (EVP and CFO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Mike Dahl of RBC Capital Markets. Your line is open.
Mike Dahl (Managing Director and Equity Research Analyst of Homebuilders and Building Products)
Good morning. Thanks for taking my questions, and I'll also offer my congrats on closing the deal.
Sheryl Palmer (Chairman and CEO)
Thanks, Mike.
Mike Dahl (Managing Director and Equity Research Analyst of Homebuilders and Building Products)
A couple of questions kind of focused around some of the AV Homes impacts. So first one, Dave, could you detail kind of what the closings guidance includes for AV Homes units in 4Q? And then also, as you're thinking about kind of the you gave us the margin that's all in terms of purchase accounting, what's your current expectation as far as the total purchase accounting impact over the next handful of quarters?
Dave Cone (EVP and CFO)
So for the fourth quarter, it's about 600 units for closings related to AV. That's in our closing guidance. And as far as your second question regarding the PPA, really what we're kind of focused on right now is fourth quarter. We've had them now for 29 days inside the portfolio, so we're still doing the fair valuation work, and that's going to be wrapped up here in probably the next month or two. So I don't want to get too far out ahead with 2019 quite yet, but I'd tell you that the drag that we're seeing in the fourth quarter is going to be the most significant. We'll see a little bit less drag probably in the first quarter, and then it starts to really come down in the second quarter, and we'll work through it by the end of the third quarter next year.
Mike Dahl (Managing Director and Equity Research Analyst of Homebuilders and Building Products)
Got it. Okay. Thanks. And my second question then, just following on, it seems like the AV closings have been pretty light. They had a guide out there early in the year. It looks like they're falling or would have fallen well short of that. I know that may be one reason why there was some back and forth on the deal towards the end, but could you just give us a little insight as to how the last few months progressed for AV from an order standpoint and any color you have on kind of what you think a good run rate would be for that business as we're thinking about contribution for a full year?
Dave Cone (EVP and CFO)
Sure. I'd start with, it's hard to get into where the street was for AV or where their projections were. Obviously, they weren't in our portfolio at that time.
What I can tell you is based on our underwriting around the transaction, it's very much in line. And you're right. That did lead to some discussion around price and got us to where we ultimately ended up, which was around book value. So we're actually comfortable with the way that business has been trending. And as we go into the fourth quarter, again, I would say our expectations are in line with underwriting, with maybe the caveat of obviously the softness that the industry is seeing. There might be a little bit of kind of delay in timing on some of that, and we'll work through that as we will on the legacy side of the business.
Sheryl Palmer (Chairman and CEO)
And maybe I'll just pile on, Michael, because I think Dave's right. I mean, from a run rate standpoint, this is generally in line with what we thought.
And once again, as he said on maybe the last few weeks of softness and just what they were going through as the company was being sold. But as we look forward, I'll tell you we're excited about a lot of the assets. And I think we've talked about this pretty openly since the deal was done. You look at Arizona, and it's a very strong business. It's a very nice complement to ours. You look at Florida, same thing. It's a really big business with a nice active adult presence balanced with a very affordable consumer. And once again, we're very excited on what that does for our business in Orlando. And then we add Jacksonville. We've got some work to do to get that thing up to scale. The Carolinas put us in a top five position in both Charlotte and Raleigh.
We needed to work through, and they did pretty much before the closing, some of the legacy stuff on their Raleigh acquisition, but as we look forward, we're excited, and then Dallas was probably the area where we're having to make the most changes on the land portfolio, the product positioning, really make sure it's appropriately targeted to the consumer in the right submarkets, so some repositioning to do. We've got some opportunities to take some of their product as well, so it will take us, as I said before, a couple of quarters, so I think we'll get a better run rate when we really are able to kind of synthesize the positioning appropriately to the consumer.
Dave Cone (EVP and CFO)
But we hit the ground running on day one on October 2nd. We actually had our teams merge physically in one location. We are now one team.
That's at the corporate and at the division level. And of course, we're going through right now our planning process for next year, and both sides are very much a part of that. So we're actually excited at where we are right now.
Mike Dahl (Managing Director and Equity Research Analyst of Homebuilders and Building Products)
Okay. That's helpful. Thank you both.
Sheryl Palmer (Chairman and CEO)
Thank you. Have a great day.
Operator (participant)
Thank you. Our next question comes from the line of Nishu Sood of Deutsche Bank. Your line is open.
Tim Daley (Equity Research Associate)
Hey, this is actually Tim Daley on for Nishu. Thanks for the time. So I guess quickly, so Sheryl, the last quarter you discussed repositioning along with some early closeouts, which caused a short-term reduction to the community count as well as the guidance for the second half of the year. You kind of just touched on some of these repositioning activities that were, I guess, mentioned last quarter.
So as we think about community count growth for the quarter on the legacy Taylor Morrison basis, has there been any changes in these factors which maybe could reverse some of these short-term reductions? And is this also something that you experienced at AV as you were looking at the community mix on the platform during the kind of, I guess, pre-acquisition period? Thank you.
Sheryl Palmer (Chairman and CEO)
Yeah. No, good question. Maybe I'll start with AV. I would say no, not as much on AV because we knew what we had there, and so from a closeout and opening, they didn't have a lot of new stuff coming to market. I would tell you on the legacy TM, no, they're not a real change in condition because what happened coming into the third quarter is we closed out, as I talked about in the second quarter, we closed out of communities quicker.
That was the case a few times in the third quarter, probably not quite as prevalent as it was in the second quarter when I look at closeouts versus openings. But what I will tell you, unfortunately, has stayed consistent is the difficulty in getting communities open. And I wish I could say this was just happening in a market or two, but we are really seeing this across the portfolio. And I think it's the most difficult thing we have to give you guys is community count guidance because I think best intentions, the teams do very good planning. They work with the municipalities, but it's tougher on getting stuff out of the cities, getting actually first those maps approved, the starts. So if there's an area that we very rarely get to pull up, it's new communities.
So even though we close them quicker, our ability to recapture earlier than planned is very difficult. We do our best to hold steady and not see delays in other communities that are expected to open in those quarters.
Tim Daley (Equity Research Associate)
I really appreciate the detail there. So I guess on my second question, thinking about kind of the mix of the two businesses as well. So you'd mentioned earlier on the call the kind of varying sensitivity in the recent changes in affordability across the buyer types that are serviced by Taylor Morrison. So you particularly highlighted the kind of entry-level feeling a bit more pain there. So could you kind of give us an update on what the resulting mix is across the new platform in terms of units, so kind of entry-level versus active adult, where that stands? Thank you.
Sheryl Palmer (Chairman and CEO)
Yeah. In the quarter, I would tell you for third quarter, it hasn't changed dramatically from prior quarters as far as when we've always, I think, historically talked about that third, third, and the third, that first-time buyer being a third, but maybe a more what we've called a professional first-time buyer. Going forward, what will happen is you'll have a change in that first-time buyer mix because we will have a more affordable first-time, larger percentage of the portfolio going forward. That move-up, I think, comes down just as a result of both ends of the barbells going up from a penetration standpoint. And then one of the things we've been so excited about with AV is their active adult penetration, but they've done it a little differently.
Our active adult tends to be at a little bit higher price point, a little bit more of a luxury adult buyer, where theirs is a more affordable. So I think you're going to see the active adult move up slightly, the overall first-time move up slightly, and the middle will get squeezed. Great.
Tim Daley (Equity Research Associate)
Thanks for the details.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Matthew Bouley of Barclays. Your line is open.
Matthew Bouley (Senior Equity Research Analyst of U.S. Homebuilding and Building Products)
Hi. Thank you for taking my questions. I wanted to ask about the full-year sales-based guidance. It seemed to suggest a decline year-over-year in the fourth quarter pro forma. And correct me if I'm wrong there. And obviously, you mentioned some caution around your ability to sell and close in 4Q and whether it's a part of that.
But is there anything related to the integration in there as well, or really is this kind of just a market issue, as you say? Thank you.
Sheryl Palmer (Chairman and CEO)
No, thank you. I'd say it's more market. October isn't what we had hoped. The good news about October is we've seen week-over-week improvement. So we kind of hit what we believe our trough was at the end of September, and we've seen it pick up a little bit each week, but certainly not at the levels that we're comfortable with. As you move further into the fourth quarter, it's hard to imagine that gets significantly better. So we're still sharing that we'll hit our original guidance for the year despite the softness. Part of that is obviously with the help of AV. But I'd say it's more market-related than anything else.
Matthew Bouley (Senior Equity Research Analyst of U.S. Homebuilding and Building Products)
Okay. That's helpful. And then just second question quickly, the 20% year-over-year increase in specs, is there anything that you wanted to call out there? Is that kind of potential strategic changes just kind of around what you're saying is happening or what you're seeing in the market right now, or is that really just timing? Anything there? Thank you.
Dave Cone (EVP and CFO)
It's probably more timing than anything. I mean, we're a bit higher overall if you take specs and process and the completed specs. Partially, that was trying to have a bit more on the finished spec side. We've talked for the last couple of quarters. We actually think we run maybe a little bit low on a finished spec per community. But obviously, with the current environment, we're maybe not seeing as many spec sales right now. We talked about some of that impact in the fourth quarter.
But we saw this, obviously, several weeks ago. So probably at the end of August, we started to slow new spec starts. So the spec count kind of overall, you'll probably see that even out in the first half of 2019, which gets me to it's really more around timing.
Matthew Bouley (Senior Equity Research Analyst of U.S. Homebuilding and Building Products)
Okay. Thanks for the details.
Operator (participant)
Thank you. Our next question comes from the line of Jay McCanless of Wedbush Securities. Your line is open.
Jay McCanless (Equity Research Analyst)
Morning, everyone. Thanks for taking my questions. The first one I wanted to touch on, could you guys give us what the operating data, orders, backlog, etc., was for AV at the end of their September quarter?
Dave Cone (EVP and CFO)
You bet. So their backlog units were 1,024, and the value of that was $350 million. ASP and backlog around $342.
Jay McCanless (Equity Research Analyst)
Okay. And then do you have what they booked for orders in the quarter?
Dave Cone (EVP and CFO)
They were 576, which was a little bit up over the prior year, about 4.5%.
Jay McCanless (Equity Research Analyst)
Good deal. Thank you. The next question I had, Sheryl, I wanted to touch on what you talked about with land earlier. You said some deals had been coming back to you guys, but at the same price you had seen them before. Is that correct? And are you seeing any areas where land prices maybe are finally starting to break a little bit?
Sheryl Palmer (Chairman and CEO)
Yeah. Very market specific. There are places where it should be breaking, and it's not. But what I would tell you is there are some markets where we put in offers, and we were probably in second place, and we were probably shy, but that's okay because we stay true to our underwriting. And lo and behold, two, four, six weeks later, they come back.
And honestly, two, four, six weeks later, prices have moderated, so our price doesn't hold what it was. So you find yourself negotiating. So that would be an extreme example of where I would tell you when the seller has lost a transaction that maybe they're willing to talk with you. Most often, what happens is our teams go in, they meet with sellers and try to show them the facts to help them understand. We're pretty transparent about our modeling and showing them how we get to our offers. But if I were to take the most broad statement, quite honestly, we're not seeing maybe a little bit in terms, but very, very reluctant sellers to move on price yet. I don't think you've seen enough. I don't think you've seen pain in the markets to let that happen quite yet.
Jay McCanless (Equity Research Analyst)
Got it. Thank you. Then the last one I had, and apologies if you've already given it, but what was the cancellation rate for the quarter, and what was it last year?
Dave Cone (EVP and CFO)
The cancellation rate for the quarter was 1,470. Last year was 1,240. But to Sheryl's comment, we saw the trough on sales at the end of September. We also saw cancellations kind of peak at that point too. We've seen as sales have picked up the last several weeks, and in October, every week's been better than the previous week. We've also seen the cancellation rate drop.
Jay McCanless (Equity Research Analyst)
That's great news. Thanks for taking my questions.
Sheryl Palmer (Chairman and CEO)
Thank you. Have a good one.
Jay McCanless (Equity Research Analyst)
You too.
Operator (participant)
Thank you. And our next question is from the line of Ryan Gilbert of BTIG. Your line is open.
Carl Reichardt (Managing Director and Partner)
Hey, guys. It's actually Carl Reichardt. You literally just got through all my questions except one.
Sheryl, can you talk a little bit about what the elastic response has been? In places where you have offered incentives, whatever they may be, is the consumer continually hesitant, or are you seeing them bite when you're offering those incentives? How low do you have to go? Just trying to gauge elasticity as opposed to, I guess, expectations of further reductions.
Sheryl Palmer (Chairman and CEO)
Yeah. It's so hard to answer that generically because you really have to dive into the detail. I'm not hedging the question. I'm just seeing some places where we haven't had to. I would take a market like Phoenix where I was looking at incentives quarter over quarter, house by house. We haven't had to do anything. And then there's other markets where you're absolutely seeing a tick up in incentives.
It could be $2,500, and a refrigerator could get somebody off the mark, and others it could be, depending on price point, 10 to 15. We are tending to, like I said earlier, really do that within the mortgage company or tying it to the mortgage company and really work to their mortgage product. So we really do use the incentives in a way that best fits the needs of that customer. It's better than just throwing generic dollars at it. It's really understanding what their need is to get to the closing table and almost personalizing the incentive for them.
Carl Reichardt (Managing Director and Partner)
Just as a follow-up, would you generalize and say that the elasticity is less prevalent in a market where prices had really run up aggressively, like California, relative to a market where the supply-demand dynamics are sort of a little more fluid, like Texas?
Sheryl Palmer (Chairman and CEO)
Sure. That would be a fair comment.
Dave Cone (EVP and CFO)
Yeah. I mean, overall, I think that's fair. You always have to go even a little bit below the market. Even in Southern California, there's parts of it that continue to do well, and there's other parts that are probably a little bit more challenged around affordability. So I don't know if you'd want to paint necessarily a broad brush around an entire market. It is a little bit community-specific.
Sheryl Palmer (Chairman and CEO)
And it's moving so fast. I mean, you picked on Southern California. People start talking about Southern California slowing down many months ago. Really, it's probably been three, four months. I think we've been hearing about it for different reasons. First, we heard about the Chinese buyer. Then we heard about pricing, interest rates. We really started seeing it about four weeks ago.
Now, we changed our strategy in Southern Cal, and we went to a more affordable in the inland as well as Irvine. And I'm very pleased the team did that two, three years back. So it's so sensitive because four weeks ago, I would have had a very different answer. And today, I'm going to tell you that absolutely sales have slowed down, and incentives have ticked up.
Carl Reichardt (Managing Director and Partner)
Thanks, Sheryl. Thanks, Dave.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Alex Rygiel of B. Riley FBR. Your line is open.
Alex Rygiel (Senior Managing Director)
Thank you. Have you seen any change in consumer appetite for options and/or lot premiums?
Sheryl Palmer (Chairman and CEO)
Not at all. Usually, it's a really good question because, and once again, I mean, some of what I'm sharing is kind of third quarter. So those are sales that we would have seen early in the year.
But usually, the first thing that goes is lot premiums, not necessarily options, to be honest, because they want what they want in the house. But when I look at the percentage of options and backlog and everything, there's no material movement.
Alex Rygiel (Senior Managing Director)
Excellent. And how should we think about mix shift as we look out into 2019? I know you've talked a fair amount about mix. It almost sounds like if we just take former Taylor Morrison, probably don't anticipate too much mix shift in 2019. Is that a fair conclusion?
Sheryl Palmer (Chairman and CEO)
Yeah. Except, like I said before, except I think you'll see your first timer tick up. You'll see your active adult tick up, and the middle will get squeezed.
Alex Rygiel (Senior Managing Director)
Right. On a pro forma basis.
Sheryl Palmer (Chairman and CEO)
Yeah.
Dave Cone (EVP and CFO)
The percentages.
Sheryl Palmer (Chairman and CEO)
Yeah. As I was looking at 2019. Going back to your other question, though, just to make sure I properly answered it, I think if we start to do more work with the more affordable buyer, I do think we'll see more sensitivity on both options and lot premiums. So I think we'll watch that closely and report it out in the coming quarters.
Alex Rygiel (Senior Managing Director)
Thank you for the very helpful. Thank you.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question is from the line of Alex Barron from Housing Research. Your line is open.
Alex Barron (President)
Hi. Good morning. I think I heard you say you were starting to tweak your spec start strategy. I was just curious about generally your strategy if the market were to stay slower longer than you expect, how that would adjust.
Dave Cone (EVP and CFO)
Yeah. I mean, when we say tweak, I guess let's revisit what we did. If you go to the last couple of quarters, we've talked about our finished specs per community being a little bit lower. We thought there was opportunity to increase that by a slight amount. I mean, we're still targeting about one per community, and we've been running under that. So we put a little bit more specs into the ground, again, just a little bit more earlier in the year. And as we saw things soften, we just dialed that back to kind of more normal levels. So we're comfortable where it is right now, and we think it's going to even out in the first half of next year. Obviously, if we see something more prolonged around this current environment, we'll just be mindful about how we're putting specs into the ground.
As you know, we're very focused on inventory management, and a spec is a big component of that.
Sheryl Palmer (Chairman and CEO)
And Dave, when you say that some piece of that is also really the mix shift you spoke of before, that for some reason over the last quarter or two, we are seeing people prefer a to-be-built.
Dave Cone (EVP and CFO)
To-be-built.
Sheryl Palmer (Chairman and CEO)
And so it's making our specs just a little bit longer. So we'll have to see if that continues.
Dave Cone (EVP and CFO)
But I'd tell you I don't have any real concern over the spec count. We do a really good job of selling the vast majority of them before construction's complete. And like I said, if we tick up a little bit, I think it's just going to be a short duration just given the amount of specs we're putting in the ground.
Alex Barron (President)
Got it. In terms of the nature of incentives that you're offering or what you're finding to be most effective, are you mainly offering rate buydowns, or are you offering more credits toward design center, or are you having to cut prices? What are you guys finding right now?
Sheryl Palmer (Chairman and CEO)
It's very, very rare that we actually adjust base prices. You don't do that because of your backlog. You don't do that because of the impact to the community. So we are certainly not seeing that. I would tell you that you probably start with options generally, but usually, it's tied to a piece of that's tied to the mortgage program. But we vary, like I said, a couple of times.
We really do work with the customer to understand what their needs are and how to best use those dollars because some really do need the help at closing and some with closing costs and cash, and others don't, and they've got the cash, but they're very focused on a lower rate. Some are trying to get extended locks because they want us to build the house and not buy a spec, and so we'll use those dollars to extend a lock or to buy down points, so it's really about not locking into one program and being flexible for the consumer.
Alex Barron (President)
That makes sense. Okay. Great. Thanks.
Sheryl Palmer (Chairman and CEO)
Thank you. Have a great day.
Alex Barron (President)
You too.
Operator (participant)
Thank you, and at this time, this does conclude the question-and-answer session. I'd like to turn the conference back over to Ms. Sheryl Palmer for any closing remarks.
Sheryl Palmer (Chairman and CEO)
Thank you all for hanging with us today and joining us on our Q3 call. Have a great day, and we'll talk to you next quarter.
Operator (participant)
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.