Robert T. O'Shaughnessy
Executive Vice President and Chief Financial Officer at PulteGroup
Thanks, Ryan, and good morning. As Jim noted at the beginning of the call, we have reclassified closing cost incentives from cost to sales to net revenues for all periods presented. The total incentive reclassified amounts to $81 million in the first quarter of this year and $38 million in the first quarter of last year. This reclassification impacted our reported home sales revenue and associated average sales prices as well as our reported home sale gross margin and SG&A percentages.
An analysis of the impact of this reclassification in the current quarter and prior year periods is included in today's webcast slides. Where appropriate, any numbers referenced in my comments, current, past or future, are inclusive of this reclass.
Let me now get started with a review of our first quarter results. Home sale revenues in the first quarter increased 15% over the prior year to a first quarter record of $3.5 billion. Higher revenues for the period reflect a 6% increase in closings to 6,394 homes and a 9% increase in average sales price to $545,000. On a year-over-year basis, we realized higher average sales prices across all buyer groups, led by double-digit gains in both move-up and active adult.
In the quarter, we reported 6,394 closings, which represents a 6% increase over the comparable prior year period. Our closings for the quarter came in above our guide as we capitalized on stronger demand for spec homes and improvement in select areas of our supply chain that allowed us to close additional homes in the period.
I'd like to take a moment to thank our procurement and construction teams working in partnership with our trades and suppliers for their contributions over the last several quarters. Their efforts during a time of extraordinary market volatility were instrumental to the operating success we have achieved.
Looking at the mix of our closings in the quarter, our results included 39% from first-time buyers, 35% from move-up buyers and 26% from active adult. In the first quarter of last year, the closing mix was 34% first-time, 40% move-up and 26% active adult. The higher percentage of closings from first-time buyers reflects our increased investment in that part of our business over the last several years as well as an increase in the availability of spec homes in our first-time communities resulting from our decision to increase spec production in the back half of 2022.
Looking at our orders in the quarter, our net new orders totaled 7,354 homes, which is down 8% from the prior year. Our cancellation rate as a percentage of beginning backlog was 13% in the first quarter, which is up from 4% last year. On a sequential basis, 13% cancellation rate is up less than 200 basis points from the fourth quarter. So cancellations are beginning to stabilize.
In fact, on a unit basis, cancellations in this quarter amounted to 1,544 homes, which is down sequentially from 1,871 homes in the fourth quarter. By buyer group, net new orders to first-time buyers increased 18% over the prior year to 3,177 homes, while move-up orders decreased by 20% to 2,645 homes and active adult orders were lower by 22% to 1,532 homes.
Our average community count in the first quarter increased 13% over last year to 879. Based on the communities opened in the period, our absorption pace of 2.8 homes per month was down from the prior year, but in line with our pre-pandemic sales rate, which averaged 2.7 for the five-year period from 2016 to 2020. Based on land investments we made in prior years, we expect to operate out of approximately 900 communities in the second quarter, which would represent an increase of 14% over the second quarter of last year.
Looking over the balance of the year, we continue to expect community count growth of 5% to 10% over the comparable prior year quarter. Given our expanding community count, PulteGroup is well positioned to increase its market share within the improving demand environment. We ended the first quarter with a backlog of 13,129 homes with a value of $8 billion. This compares with last year's Q1 record backlog of 19,935 homes valued at $11.5 billion.
At the end of the first quarter, we had a total of 16,872 homes under construction, of which 15% were finished. Spec units represented 38% of our production, which is up from last year and consistent with our strategy to have specs available to meet buyer demand for homes that can close sooner.
Over the course of the first quarter, we started production on approximately 5,200 homes. This start rate was down about 40% from the first quarter of last year, but up on a sequential basis from the fourth quarter of 2022 as we continue to drive an appropriate start cadence as we focus on turning our assets.
Based on the roughly 17,000 homes we have under construction and their stage of production, we expect to deliver between 7,000 and 7,400 homes in the second quarter. Given the ongoing improvement in the overall operating environment, we're pleased by the level of production we've been able to realize, thanks to the efforts of our outstanding operating teams.
In addition to these higher unit volumes, we are also seeing the beginning stages of a shortening in our production cycle. At this point, depending upon the market, the gains range from just a few days to a few weeks, but the trends are generally positive. Based on our strong Q1 results and the potential for cycle times to gradually improve, the production potential of homes we will have available to close in 2023 has increased to 27,000, 28,000 [Phonetic] homes. This is up from our initial guide of 25,000 homes.
Obviously, the strength of sign-ups in the second quarter will go a long way in determining how much of this production universe actually converts into 2023 closings. While the average sales price in our backlog is $608,000, we currently expect the average sales price to our second quarter closings to be in the range of $525,000 to $535,000. That estimate reflects both the mix of homes scheduled to close as well as the impact of anticipated spec closings, which are primarily first-time homes that have a lower average sales price.
We reported first quarter gross margin of 29.1%, which was 20 basis points below last year. Please note that our reported gross margins in the first quarter benefited by approximately 70 basis points from the reclass of closing incentives from cost of sales to net revenue. The benefit to our first quarter 2022 gross margin was 40 basis points.
I would highlight that in the current quarter, our margins benefited from our move-up and active adult business where pressures on our selling prices have been relatively less impactful compared with entry-level homes. After several years of gross margin parity across buyer groups, we are seeing a reversion to the historic trend of higher margins in our move-up and active adult business.
Based on the mix of homes we plan to close in the second quarter, we expect gross margins to be in the range of 27.5% to 28%. As with our closings and reported margins in the first quarter, deliveries in the second quarter will reflect the benefit of lower lumber costs that are flowing through our operations.
In the first quarter, we reported SG&A expense of $337 million or 9.6% of home sale revenues. In the comparable prior year period, our SG&A expense was $329 million or 10.9% of home sale revenues. Higher closings and associated revenues in this year's first quarter drove the improved overhead leverage relative to last year and our guide.
With expected 2023 production volumes moving higher, we are carefully adding sales and construction staff, but still expect to maintain overhead leverage. As such, we expect second quarter SG&A to be in the range of 9.0% to 9.5%. In the first quarter, our financial services operations reported pretax income of $14 million, which is down from $41 million in the prior year.
Pretax income in the period was impacted by lower loan volumes, competitive pricing dynamics and higher mortgage incentives being used throughout the industry. In Q1, our capture rate was 78% compared with 81% last year. Market conditions have clearly improved, but as we do under all market conditions, we continue to routinely reassess our owned land positions and pending land transactions.
Based on this review process, in the first quarter, we walked away from 5,300 lots that were previously held under option and wrote off approximately $6 million in associated deposits and pre-acquisition costs. In the first quarter, our reported tax expense was $170 million or an effective tax rate of 24.2%. We expect our tax rate in the second quarter to be 24.5%.
Our net income for the first quarter was $532 million or $2.35 per share, which is up from prior year net income of $455 million or $1.83 per share. In addition to significantly higher net income, our earnings per share benefited from the Company's share repurchase program. In the first quarter, we repurchased 2.8 million common shares at a cost of $150 million or an average price of $54.30 per share.
Consistent with our plans to continue returning excess funds to our shareholders, our Board has approved an additional $1 billion of share repurchase authorization, bringing the total available under the program to $1.2 billion. Along with returning funds to our shareholders, we continue to strategically invest in our business.
In the first quarter, we invested $906 million in land acquisition and development, down from $1.1 billion in Q1 of last year. Given the stronger demand environment and the increase in our overall construction activities, we now expect to invest between $3.5 billion and $4 billion in land acquisition development in 2023.
We ended the period with 210,000 lots under control. This is consistent with year-end and down 10% from last year. Based on our activity over the past several quarters, 51% of those lots are owned and 49% are options. We will continue to seek increased optionality of our land bank with a target of up to 70% of our lots being controlled via option.
Reflecting the strength of our first quarter financial results and associated cash flows, we ended the quarter with $1.3 billion of cash, which lowered our net debt-to-capital ratio to 7.2%. On a gross basis, our debt-to-capital ratio was 18.1%, down from 21.5% at the end of the first quarter last year.
Now, let me turn the call back to Ryan for some final comments.
