The Blubber

You can see this in their earnings call, which is attached below:

Thank you, Jamie. Good morning. Welcome, and thank you all for joining us. Before I begin, I ask you to read our statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the availability of labor and materials inflation and many other factors beyond our control that could significantly affect future results.
With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP and Treasurer.
We are very pleased with our second quarter results. As mortgage rates have stabilized and buyer confidence has improved, the increase in demand that began in January has continued through our second quarter and into the start of our third quarter. This improvement in demand, combined with our strategy of increasing our supply of spec homes into the spring selling season, and our focus on operational efficiency, has resulted in second quarter performance that well exceeded our guidance.
As a result, we are raising our full year guidance across most metrics. We delivered 2,492 homes in the second quarter at an average price of $1 million, generating home sales revenues of approximately $2.5 billion each a second quarter record. Deliveries exceeded the midpoint of our guidance by nearly 400 units, primarily due to cycle time improvements and an increase in the number of spec homes we settled in the quarter. Adjusted gross margin of 28.3% in the second quarter improved 220 basis points compared to last year's second quarter and was 130 basis points better than guidance.
Our homebuilding gross margin benefited from cost controls and greater leverage on fixed costs from higher homebuilding revenues. Our SG&A expense in the second quarter was $16 million lower than Q2 of last year. We are benefiting from approximately $50 million of cost reductions that we have taken over the past year, which we expect to be permanent savings, and we continue to target additional opportunities to become even more efficient. As a result of the significant beat on our top line and improved margin performance, we generated second quarter pretax income of $430.6 million and earnings per share of $2.85, up 46% and 54% and respectively, compared to last year's second quarter, both second quarter records.
At second quarter end, our backlog stood at $8.4 billion and 7,574 homes. Our cancellation rate as a percentage of backlog was an industry low 3.9% in the second quarter.
As a reminder, our buyers are financially invested in their new homes as they make sizable nonrefundable down payments that average approximately $85,000. They also become emotionally invested as they personalize their homes by selecting their home sites, adding structural options to match their lifestyles and selecting finishes that reflect their tastes. In short, they stick. And the profile of our typical buyer is well suited for the current market.
Our buyers are more affluent and tend to have significant equity built up in their existing homes, which better insulates them from affordability concerns and makes it easier for them to move.
In the second quarter, 23% of our buyers paid all cash and those who took a mortgage averaged approximately 70% loan to value. In the second quarter, we signed 2,333 net contracts for $2.3 billion, down 19% in units and 26% in dollars compared to our very strong second quarter last year. Although our second quarter contracts were down on a year-over-year basis, demand has improved significantly compared to the previous 3 quarters.
As I mentioned on our last call, we saw demand start to improve in January. I'm pleased to report that these more favorable conditions have continued through our second quarter and into the start of our third quarter. Physical traffic, web activity and deposits in the first 3 weeks of May have all been very encouraging. Overall, buyers appear to be adjusting to mortgage rates that have stabilized in the 6% to 7% range. The shock of last year's abrupt spike in rates appears to be wearing off and buyers are moving on with their lives.
As I pointed out in the past, there is a substantial shortage of homes for sale in the U.S. with housing starts failing to keep up with population growth, for at least the past 15 years. Now with 90% of outstanding mortgages under 5%, the market is seeing the further impact of a low interest rate lock-in effect, existing home buyers -- excuse me, existing homeowners are reluctant to give up their low rate mortgages, which has led to historically tight resale inventories.
In fact, according to recent reports, approximately 35% of homes currently for sale are new construction compared to the historical norm of between 10% and 15%. This phenomenon has become a boon for homebuilders and especially the larger, well-capitalized public builders who are more efficient and better positioned to take advantage of opportunities compared to smaller private builders. With such low levels of resale inventory on the market, buyers are gravitating to new homes. As they do, they benefit not just from the opportunity to buy new, but they can also take advantage of incentives like rate buy downs that are generally not available on resale homes.
In addition to the underproduction of new homes in this country and the low level of resale inventory, there are many other factors that continue to support the housing market. These include favorable demographics with millions of millennials and baby boomers on the move. Millennials, in particular, are buying their first home later in life when they have higher incomes and accumulated wealth. Migration trends are driving the population south and west, which not only increases demand in these markets, but alleviate some of the affordability pressures as buyers move from high cost to low-cost markets. More flexibility in the workplace also supports this migration and the housing market in general as buyers place a greater emphasis on their homes. These trends have staying power that we believe will continue to support housing demand for years to come.
A key part of our strategy heading into the spring selling season was to focus on increasing our supply of spec homes to support deliveries in the second half of fiscal '23 and throughout 2024. With demand better than expected this spring, this strategy is paying off. Demand for our spec homes in the second quarter remained strong, representing approximately 40% of our orders in the quarter.
As a reminder, we define a spec home with any unsold home with at least a foundation in the ground. We sell our specs at various stages of construction which still allows many of our buyers the opportunity to personalize their finishes. For those who prefer an even quicker move in, when we do finish our homes, we include designer-appointed features that reflect the luxury Toll brand.
Specs also allow buyers to lock their mortgage rates at or near the time of contract. We believe that in this market, our spec strategy continues to make sense. With such limited resale inventory, specs fill a significant gap in supply. We expect that specs will continue to comprise between 30% and 40% of our sales for the foreseeable future. The more stable environment has allowed us to increase price in more than half of our communities. Factoring in base price increases and incentive reductions, we have increased price by an average of approximately $25,000 per home in the second quarter. We also saw modest improvements in our supply chain and some easing in labor constraints, especially at the front end of the construction process.