Robert T. O'Shaughnessy
Executive Vice President and Chief Financial Officer at PulteGroup
Thanks Ryan, and good morning. As Ryan mentioned in his comments, market conditions changed meaningfully as the fourth quarter progressed, and as mortgage rates began to fall. Our reported financial results for the period were influenced by these evolving market dynamics, so I'll note any important areas of impact in my prepared remarks.
Home sale revenues in the fourth quarter were $4.2 billion, compared with $5 billion in the prior year. Our lower home sale revenues for the period primarily reflect a 14% decrease in closings to 7,615 homes, along with a 2% decrease in our average sales price to $547,000. I would highlight that our fourth quarter closings came in about 5% below our previous guide, as sales early in the quarter were negatively impacted by higher mortgage rates and the general softening in overall buyer demand.
As Ryan noted, home buying demand accelerated the back half of the quarter, but sales -- particularly sales of finished spec homes that would close in the quarter finished below our assumptions. We could have captured incremental sales and closing value by offering higher incentives, but we didn't see that as a worthwhile tradeoff.
Given that buyer trends have remained positive in January, I think we made the right choices as we have inventory available to meet the stronger demand. Our mix of closings in the quarter were comprised of 40% first time, 36% move up and 24% active adult, which is in alignment with our stated goal for the buyer mix for our business. In the fourth quarter of '22, closings were 36% first time, 39% move up and 25% active adult.
Our average community count for the fourth quarter was 919, which represents an 8% increase over last year's fourth quarter average of 850 communities, and was in line with our prior guidance.
Looking at order activity in the quarter, our net new orders increased 57% over last year to 6,214 homes. The large increase over last year reflects both improved demand in 2023 as well as the extremely difficult operating environment in the fourth quarter of 2022.
As discussed previously, demand conditions grew increasingly difficult early in the fourth quarter this year as mortgage rates climbed to 8%, but we experienced a notable improvement in buying activity as rates decreased over the back half of the quarter. On a sequential basis, our absorption pace improved from November to December, and we would attribute much of this improvement to the decline in interest rates.
Along with stronger demand conditions, the year over year increase in fourth quarter net new orders benefited from a decrease in cancellation rate. In the most recent quarter, cancellations as a percentage of beginning period backlog fell to 9%, down from 11% in the comparable prior year period.
Looking at our order activity by buyer group, fourth quarter net new orders increased 70% for first time buyers, 78% for move up buyers and 15% for active adult buyers. Our order numbers indicate that demand improved across all buyer groups, which is a very positive dynamic when assessing potential housing demand in 2024. As a result of our sales and closings activity, our quarter end backlog was 12,146 homes, which is effectively flat with last year. Reflective of the increased mix of first-time buyers and their lower average sales prices, our ending backlog value declined slightly to $7.3 billion. Inclusive of the 7,128 homes we started in the fourth quarter, we ended the year with 16,889 homes in production. 44% of our production is spec, including 1,263 finished specs, which puts us in a strong position to meet buyer demand as we head into the spring selling season.
By the end of the fourth quarter, our construction cycle time was down to 130 days, which is a sequential improvement of about two weeks from the end of the third quarter. Going forward, we continue to target getting our cycle time down to 100 days or below by the end of the year.
Based on our production pipeline, we expect closings in the first quarter of 2024 to be between 6,200 to 6,600 homes, and given our units under production, we expect full year deliveries to grow by 5% to 30,000 homes. We currently expect the average sales price of closings to remain in the range of $540,000 to $550,000 for the first quarter and the full year of 2024, which is consistent with our fourth quarter pricing. At the midpoint, this would imply price stability over the course of the year.
Our fourth quarter gross margin was 28.9%, which is down approximately 50 basis points from both the fourth quarter of last year and the third quarter of this year, but likely remains the industry leader among the big builders. As with the entire year, our fourth quarter margins reflect higher incentive and input costs. Incentives, which primarily impact revenues, increased 50 basis points sequentially from the third quarter to 6.5%.
On the cost side, lower lumber prices offset inflation and other material and labor, but higher land and land development costs impacted margins in the period. Even my prior comments that we expect pricing to be flat in 2024, we anticipate that land and house cost inflation will result in gross margins to be in the range of 28% to 28.5% for each quarter during the year.
We reported fourth quarter SG&A expense of $308 million or 7.4% of home sale revenues compared with prior year SG&A expense of $351 million or 7.1%. The 30-basis point drop in overhead leverage can be attributed to the lower closings and revenues realized in the quarter versus the prior year. It should be noted that we recorded $65 billion of pretax insurance benefits in the fourth quarters of both 2023 and 2022. Based on anticipated closing volumes, we expect SG&A expense for the full year of 2024 to be in the range of 9.2% to 9.5% of home sale revenues. Given our typical seasonality of closings, we expect SG&A expense in the first quarter to be approximately 10% of home sale revenues, with overhead leverage improving as we move through the remaining quarters of the year.
For the fourth quarter, our financial services operations reported pretax income of $44 million, which is up from $24 million last year. The improvement in pretax income reflects more favorable market conditions across our financial services platform coupled with higher capture rates, including an increase to 85%, up from 75% last year in our mortgage operations.
Our reported pretax income for the most recent quarter was $947 million compared with prior year pretax income of $1.2 billion. In the period, we recorded tax expense of $236 million for an effective tax rate of 24.9%. Projecting ahead to 2024, we expect our full year tax rate to be in the range of 24% to 24.5%.
Looking at the bottom line, our reported fourth quarter results show net income of $711 million or $3.28 per share. In the comparable prior year period, we reported net income of $882 million or $3.85 per share. For the full year of 2023, we reported net income of $2.6 billion and a record earnings of $11.72 per share.
Reflective of our strong operating results in 2023, we generated cash flows from operations of $2.2 billion. Given our current expectations for operating and financial results, along with our plans to increase land investment to $5 billion in the current coming year, we expect 2024 cash flows from operations to be approximately $1.8 billion.
Turning to our investment in capital allocation activities, we invested $1.3 billion in land acquisition and development in the fourth quarter, of which 59% was for development of our existing land assets. For the year, our land investment totaled $4.3 billion of which 59% was for development. Given our constructive views on near- and longer-term housing dynamics, as noted, our plan is to increase our land spend to approximately $5 billion in 2024. We would again anticipate a roughly 60:40 split between development and land acquisition. This increase in investment is consistent with Ryan's earlier comments regarding positioning the business to routinely grow future delivery volumes by 5% to 10% per year.
Inclusive of our fourth quarter investments, we ended 2023 with 223,000 lots under control, which is an increase of 5% over the prior year. I would highlight that on a year-over-year basis, we lowered our own lot count by 4,000 lots while increasing our lots under option by roughly 16,000 lots. As a result, our percentage of lots under option increased to 53%, up from 48% last year. There's still a lot of runway ahead of us to achieve our goal of 70% option lots, but we're moving in the right direction.
Based on the investments we've made and our anticipated community openings and closings in 2024, we expect our average community cap in 2024 to be up 3% to 5% in each quarter as compared to the comparable prior year period. Consistent with our stated capital allocation priorities, we continued to return capital to shareholders in 2023. To that end, we paid out $142 million in dividends, and have increased our dividend per share by 25% starting in the first quarter of 2024.
We also repurchased 13.8 billion common shares at a cost of $1 billion, or an average price of $72.50 per share, which included $300 million of repurchases at an average price of $83.03 per share in the fourth quarter.
With the 13.8 billion shares acquired in '23, we have repurchased approximately half of the shares outstanding at the time we initiated the program back in 2013. Having repurchased these shares at an average cost of $32.16 per share, we believe it's been a great investment for our shareholders.
In addition to buying our stock in the fourth quarter, we took advantage of market conditions by using $35 million of cash on hand to pay down a portion of our debt. For all of 2023, we retired $101 million of our 2026 and 2027 senior notes through open market transactions, helping to lower our quarter end debt to capital ratio to 15.9%, down 280 basis points from last year. Adjusting for the $1.8 billion of cash on our balance sheet, we ended the year with a net debt to capital ratio of 1.1%.
Now let me turn the call back to Ryan for some final comments.
