Robert T. O'Shaughnessy
Executive Vice President and Chief Financial Officer at PulteGroup
Thanks, Ryan.
PulteGroup's third quarter results add to what has been an exceptional year for the company as we have grown revenues and earnings, generating significant cash flow from operations, lowered our debt, and generally strengthened our entire operating platform.
Specific to our third quarter, home sale revenues increased 3% over last year to $3.9 billion. Higher revenues for the quarter reflect a 2% increase in our average sales price to $549,000, in combination with a less than 1% increase in closings to 7,076 homes. The 2% gain in average sales price of homes closed in the quarter was driven by increases of 4% and 6% from move-up and active adult buyers respectively, partially offset by a 3% decrease among first-time buyers. The lower ASP among first-time buyer closings reflects our focus on remaining price competitive as interest rates have moved higher throughout the year.
The mix of homes delivered in the third quarter changed just slightly from the prior year as we continue to operate within the range of our stated mix of business. For the quarter, closings among first-time buyers represented 30% -- 38% of the business, move-up buyers totaled 37%, and active adult buyers represented 25% of the homes closed. In the third quarter of last year, 36% of homes delivered were first-time, 38% were move-up, and 26% were active adult.
Net new orders for the third quarter increased 43% over last year to 7.065 homes as we realized year-over-year gains in both units and absorption pace across all buyer groups. Orders among first-time buyers in the third quarter increased 53% over last year to 2,979 homes. The gain among move-up buyers was even greater as net new orders increased 56% to 2,524 homes. And finally on a comparable community count, we realized a double-digit gain in sales among active adult buyers as net new orders for the quarter increased to 1,562 homes.
In the third quarter, we operated from an average of 923 communities, which is up 12% over last year. Adjusting for community count, the monthly absorption pace in the third quarter averaged 2.5 homes, which is up from 2.0 homes per month in the third quarter of last year.
As a percentage of beginning backload, our cancellation rate in the third quarter was 9% compared with 8% in the prior year. To be clear, on a unit basis cancellations in the third quarter were down more than 20% from last year, but the relative size of our backlog in each period results in the cancellation rate staying comparable.
Our unit backlog at the end of the quarter was 13,547 homes compared with 17,053 homes at the end of last year's third quarter. On a dollar basis, the value of our ending backlog was $8.1 billion, down from $10.6 billion in the third quarter of last year.
At the end of the third quarter, we had a total of 17,376 homes under construction. This is down 24% from the same period last year as we strategically manage starts and realize the benefits of faster cycle times. Of the homes under construction, 61% were sold and 39% were spec units.
As we have stated previously, we are comfortable putting spec units into production, but we are thoughtful about aligning the pace of starts with the pace of sales to help reduce the risk of putting too much inventory on the ground. Consistent with this measured approach to production, of the 6,700 spec homes currently under construction, fewer than 1,000 were finished. Given our Q3 community count of 923, we continue to carry approximately one finished spec per community, which is in line with our operating targets.
Based on the homes we have in production and, as importantly, current sales trends, we expect closings in the fourth quarter to be approximately 8,000 homes. Delivering 8,000 homes in the fourth quarter would put us at 29,000 for the full year, which is down slightly from our previous guide for full-year closings to be 29,500 homes. The change in our guide reflects the more challenging affordability conditions resulting from higher rates as well as the slight shift in our mix toward build-to-order homes which won't deliver until 2024. Given the mix of homes we currently expect to deliver in the fourth quarter, we expect our average sales price on closing to be in the range of $540,000 to $550,000 in the period.
Our third quarter home sale gross margin of 29.5% continues to lead the industry as we successfully our turned our assets while still achieving high levels of profitability and driving higher returns on investment. PulteGroup's reported results benefited from strong margin performance across all buyer groups: first time, move-up, and active adult. Further, as we have talked about on prior calls, our diversified product portfolio is allowing us to capture higher gross margins that are typically available within our move-up and active adult communities.
As I would remind everyone, our primary focus is always on driving higher returns on invested capital, but we appreciate margins are an important contributor to achieving such returns. This is why we remain disciplined in where we locate and how we underwrite our communities and how we design and build our houses, and in how we strategically price our homes in the marketplace.
Given the ongoing strength of our margins, we continue to get questions regarding relative margin performance among the larger public builders. I want to quickly address the line of thought that our margins benefit from land positions within our older Del Webb legacy communities. The reality is that the margins for these communities are comparable to the rest of our active adult business, but they aren't inflating our aggregate numbers. That being said, I'm pleased to say that we expect to continue delivering high margins as we continue to expect home sale gross margins to be in the range of 29% to 29.5% in the fourth quarter. Given current interest rates, demand and cost dynamics, we would expect to be toward the lower end of this range.
SG&A expenses in the third quarter totaled $353 million or 9.1% of home sale of revenues. This compares with prior year SG&A expense of $350 million or 9.2% of home sale revenues. Based on anticipated closing volumes for the fourth quarter, we expect SG&A in the fourth quarter to be approximately 8.8%.
In the third quarter, pre-tax income from financial services was $29 million, up from $27.5 million last year. While market conditions remain highly competitive for our financial services operations, the business benefited from a higher capture rate of 84% compared with 77% last year. The large increase in capture rate relates to the expanded use of rate-based incentives, which are executed through our mortgage operations.
Looking at our taxes, consistent with our prior guide, our third quarter tax expense was $209 million or an effective tax rate of 24.6%. For the fourth quarter, we continue to guide to a tax rate of 24.5%.
PulteGroup's bottom line results show net income for the quarter of $639 million or $2.90 per share, which is up from prior year net income of $628 million or $2.69 per share.
Given the ongoing financial strength and cash flow generation of our business, we repurchased 3.8 million shares for $300 million in the quarter. This was up from $180 million last year and $250 million in the second quarter of this year.
In the third quarter, we also elected to allocate capital towards paying down a portion of our debt. In total, we retired $65 million of our 2026 and 2027 senior notes through open market transactions at prices slightly below par. Inclusive of these transactions, we've lowered our debt-to-capital ratio to 16.5%, which is down 220 basis points from the start of '23 and down 600 basis points from the third quarter of '22. Adjusting for the $1.9 billion of cash on our balance sheet at quarter end, our net debt-to-capital ratio was less than 1%.
Beyond buying back our equity and debt in the third quarter, we also invested $1.2 billion in the business through land acquisition and development, which keeps us on track to invest upwards of $4 billion for 2023. Almost two-thirds of our investment in the third quarter was for the development of our existing land assets.
Inclusive of our Q3 spend, we ended the quarter with approximately 223,000 lots under control, of which 53% are held via option. We continue to systematically rebuild the optionality of our land pipeline after having walked away from selective land positions in the back half of 2022. As part of this rebuilding process and consistent with our stated strategy of getting more land light, we are expanding our use of different land banking structures. To date, we have completed land banking transactions for approximately 5,000 lots. Going forward, we will look to use such land banking facilities in order to create optionality in situations where the underlying seller requires a bulk sale. It's a disciplined process as we work to balance land costs, returns and risk, but we are gaining momentum in our efforts.
We are also getting more questions on our land pipeline, so let me add that about one-third of the lots we have under control are developed and we continue to develop most of the lots that we acquire. As a large homebuilder, assuming you're confident in the third party's ability to consistently deliver developed lots on time, the decision to purchase finished lots versus raw dirt comes down to return. Finished lots cost more but can turn faster, whereas the lower cost of undeveloped lots can drive higher margins, but the land is on balance sheet for a little longer. In all of our land transactions, we assess how best to drive higher risk-adjusted returns and to find opportunities and deals for finished and/or undeveloped lots.
Now let me turn the call back to Ryan.
