霍頓房屋 (DHI) 2012 Q2 法說會逐字稿

Good morning, and welcome to D.R.

Horton, America's Builder, the largest builder in the United States' second quarter 2012 earnings release conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Donald J.

Tomnitz, President and CEO.

Thank you, Mr.

Tomnitz, you may begin.

Thank you, and good morning.

Joining me this morning are Bill Wheat, Executive Vice President and CFO; Stacey Dwyer, Executive Vice President and Treasurer; and Mike Murray, Vice President and Controller.

Before we get started, Stacey?

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Although D.R.

Horton believes any such things are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

All forward-looking statements are based upon information available to D.R.

Horton on the date of this conference call, and D.R.

Horton does not undertake any obligation to publicly update or revise any forward-looking statements.

Additional information about issues that could lead to material changes in performance is contained in D.R.

Horton's annual report on Form 10-K, and our most recently -- recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.

Don?

Thank you.

The spring selling season did arrive this year, and it is still in full swing.

Our net sales orders were up 55% sequentially from the December quarter, and up 19% from our second quarter last year.

Our average sales price increased to $222,700 during the quarter, and the value of our net sales orders increased 28% compared to the year ago quarter.

We have also seen continued sales strength into April.

Our sales this quarter resulted in a 17% year-over-year increase in our backlog units, which puts us in a strong position for increased revenue and profitability in the second half of fiscal 2012.

In response to our improving sales, we have increased our homes under construction while reducing our spec percentage to 50%, which is the lowest level in recent history.

We are also evaluating and selectively investing in land acquisition and development.

We are using our strong operating position and our solid balance sheet to profitably grow our business in the current housing environment.

We are demonstrating our ability to leverage our fixed costs, while increasing production in response to stronger demand in our communities, even though macroeconomic and housing conditions remain soft.

We see uneven improvement across our operating markets, with some markets experiencing increases in demand, and others remaining weak.

However, we are finding opportunities to take market share in existing markets while evaluating attractive new sub markets.

We continue to dominate the entry-level market, while expanding our product offerings for move-up buyers.

We are optimistic for the remainder of fiscal year 2012, after recording net income of $68.3 million for the first six months.

Mike?

In the second quarter, our homebuilding operations generated pretax income of $34.6 million, and our financial services operations generated pretax income of $7.7 million.

Our net income for the quarter increased 46% to $40.6 million or $0.13 per diluted share, from $27.8 million or $0.09 per diluted share in the prior-year quarter.

Bill?

Our second quarter home sales revenues increased 27% to $931 million on 4,240 homes closed, up from $733 million on 3,516 homes closed in the year ago quarter.

Our average closing price for the quarter was up 5%, compared to the prior year, and up 2% sequentially to $219,500.

Don?

Net sales orders for the second quarter were up 19% from last year to 5,899 homes on a 6% decrease in our active selling communities.

In the March quarter, our average sales price on net sales orders of $222,700 was up 7% compared to the prior quarter, and up 3% sequentially.

Our cancellation rate for the second quarter was 22%, which is very close to our historical pre-downturn cancellation rate range of 17% to 21%.

Our sales backlog at March 31, 2012 increased 17% from the prior year to 6,189 homes.

The value of the backlog increased 25% to $1.4 billion from $1.1 billion a year ago.

Stacey?

Our gross profit margin on home sales revenue in the second quarter was 17.6%, up 140 basis points from the year ago period.

80 basis points of the increase was due to cost improvements and decreased incentives and discounts.

50 basis points of the decrease was due to a reduction in amortized interest and property taxes.

Also contributing 10 basis points was a decrease in the estimated cost for warranty and construction defect claims as a percentage of home sales revenue.

Sequentially, incentives and discounts were flat.

However, our gross margin improved 80 basis points from the first quarter, due to a decrease in the estimated cost for warranty and construction defect claims, as a percentage of home sales revenues.

This largely reflects a higher level of insurance recoveries received than in the first quarter, including a $2.4 million reimbursement of costs related to Chinese drywall.

Bill?

Homebuilding SG&A expense for the quarter, which includes corporate overhead was $128 million, up only 3% from the year ago quarter, on a 21% increase in homes closed.

As a percentage of homebuilding revenues, SG&A was 13.6%, down 320 basis points from 16.8% a year ago, reflecting both the improvement in volume and our continued efforts to control costs.

We also continue to see the benefits of our aggressive debt reduction over the past several years, as homebuilding interest expense was down 63% from the year ago quarter to $5.5 million.

Our second quarter homebuilding interest incurred decreased 17% to $28.1 million.

Our capitalized interest balance at March 31 totaled $81.1 million, which is only 2.2% of inventory.

Mike?

Financial services pretax income for the quarter was $7.7 million, which included $1.1 million of recourse expense.

82% of our mortgage Company's loan originations during the quarter related to homes closed by our homebuilding operations.

Our mortgage company handled the financing for 60% of our home buyers this quarter, with virtually all loans meeting eligibility requirements for sales at Fannie Mae, Freddie Mac or Ginny Mae.

FHA and VA loans accounted for 57% of our mortgage company's volume this quarter, down from 61% in the year ago quarter.

Our mortgage company's new borrowers during the quarter had an average FICO score of 706, and an average loan-to-value ratio of 91%.

First-time homebuyers were represented 49% of the closings handled by our mortgage company this quarter.

Stacey?

Since December, our total inventory increased by approximately $155 million excluding non cash items.

We increased our homes and inventory by $82 million, and our investment in residential land and lot by $73 million.

Our homes in inventory at the end of March totaled 11,100 homes, up 900 homes from December.

As of March 31, 1,100 of our homes were models, 5,500 were speculative homes, and 2,200 of the specs were completed.

Our spec percentage improved to 50% from 56% at December 31.

Don?

In our second fiscal quarter, our investments in land, lots and developing cost totaled $319 million, which reflects our ability to find good opportunities, to open new communities and replenish our finished lot supply.

We continue to purchase or option finished lots in many markets, and are also selectively investing in land acquisitions and development opportunities to ensure we have adequate lot supplies in desirable markets.

At March 31, 2012, we controlled approximately 121,000 lots of which 86,000 are owned, and 35,000 are option.

Our owned lots include 23,000 finished lots, and 20,000 lots to be developed within the next 12 to 18 months.

Our option lots consist of 24,000 finished lots, 11,000 lots that we generally expect to purchase and develop within 12 to 18 months, bringing our minimum pipeline of finished lots over the next two years to 78,000.

Bill?

We used $79 million of cash in operations in the March quarter, primarily due to increases in homes in inventory, residential land and lots, and mortgage loans held for sale, offset by net income and an increase in accounts payable.

We ended the quarter with $961 million of homebuilding unrestricted cash and marketable securities.

The balance of our public notes outstanding at March 31 was just under $1.6 billion, with no maturities until May of 2013.

Mike?

At March 31, our homebuilding leverage ratio net of cash and marketable securities was 18.9%, compared to 18.7% a year ago.

Gross homebuilding leverage at March 31, improved 580 basis point to 37.1%, due to debt reductions and increased equity.

Stacey?

Before we move to Q&A, we wanted to share our expectations for some of our operating metrics.

With 6,189 homes in backlog at March 31, and solid sales through the first part of April, we expect stronger closings and profits in the third and fourth quarters.

Our sales during the March quarter, combined with spec inventory of 56% at the beginning of the quarter enabled us to convert 94% of our beginning backlog into closings.

With specs now at 50% of total inventory, we expect that our future backlog conversion rate will be below 90%.

Our current expectation is for home sales gross margin to remain in the mid 16% to mid 17% range.

Our absolute SG&A expense in the third and fourth quarters will increase due to variable components.

However, our SG&A percentage should improve as we close more homes, and leverage our fixed cost structure.

We continue to analyze the need for a valuation allowance for our deferred tax assets.

If our current business trends continue, we expect to be out of our three year cumulative loss position before the end of the fiscal year.

If our business, the home building industry, and economic conditions remain stable, we may be able to significantly reduce the valuation allowance at some point in the next few quarters.

Don?

I don't have a formal closing this quarter, as our strong numbers speak for themselves.

However, I would like to thank all of our DHI team mates for producing an outstanding quarter.

This concludes our prepared remarks.

We will host any questions you have now.

(Operator Instructions)

Our first question comes from the line of Adam Rudiger of Wells Fargo Securities.

Please proceed with your question.

Good morning; thank you.

Don, I was wondering if you could elaborate a bit on your comments about the improvement being uneven?

I was wondering if there are any themes between the markets that were improving and warranted, and if you could explain what those were?

And also in that, if you could comment on what you are seeing in the existing inventory market, and how that has been effecting those trends?

I'll take the second part of your question first.

I know there's a lot of media coverage around foreclosures.

And frankly, one of the things that we think is that the foreclosures that are available to our buyers today are in typically poor condition, requiring quite a bit of cash out of pocket to make them livable.

And I think that's one of the reasons why you have consistently seeing over a third, or equivalent to a third of existing home sales go to all cash buyers; which means to me investors who have the money take out of their pocket to put, to improve those homes.

But our buyers are typically looking for a new home, obviously, with a good warranty behind it; and frankly, something that they don't have to take cash out of pocket on.

So I think we're in a very strong position, notwithstanding the fact that banks are supposedly going to increase the number of foreclosures they are putting on the market.

But again, I think these are tertiary buys, compared to what the new home buy is for our customers.

Now, generally speaking, as I go across country -- and I don't like to identify markets anymore as which ones are strong in which ones are weak -- there are just several markets, and primarily in the Sunbelt, and the coastal regions, that continue to be better markets for us.

And typically those are where some job creation is taking place.

And if you certainly look at the state of Texas, state of Texas is generating jobs, and the state of Texas continues to be a very good market for us.

Okay.

Thank you.

And then my second question is -- if I just look at the prices you reported, both in closing price and order prices, generally with the exception of maybe one or two regions, they were all up.

I was wondering if you could comment on just how much that is mix related, versus your ability to raise prices now?

Bill, I think will put some more color on this.

But frankly, as you recall probably 12 months or so ago, 18 months or so ago, we began talking about focusing more on the move-up buyer.

And we have been focusing on the move-up buyer.

And I certainly think that's one of the factors contributing to our increase in our ASPs.

And generally, we believe the change in mix towards the move-up buyer is the primary driver, behind our increase in our average selling prices right now.

We do, on a very limited basis, see the opportunity to raise prices or reduce incentives somewhat, incrementally in some areas right now.

But I think by far, the largest factor is the change in products mix towards move-up.

And frankly, from the perspective of offering that move-up product with our cost structure, both from the land side as well as from the hard costs side, the direct cost side, we can develop and build better if not equally as good a product as the custom home builders, who are having difficulty getting financing, and offer a better product to the buyer.

Our next question comes from David Goldberg of UBS.

Please proceed with your question.

Thanks.

Good morning, everybody.

Good morning, David.

I wanted to follow up on Adam's question about foreclosures.

And D.T.

-- totally understood the concept that you're not really competing against the foreclosure home, given that it's in poor condition and it's a lot of out-of-pocket.

But are you worried that the foreclosures that come on the market limit the ability to raise prices?

Simply because, if an investor comes in, buys the house, prices are going up, they are more likely to flip the house, than they are to rent it?

Well, I think certainly they are going to flip the house at some point in time.

I think that clearly, they are going to take some time to fix these up.

But at the same time, I think they're going to hold them for a period when the pricing improves.

So I don't see any immediate competition from the investor, who basically probably has a two- to three-year horizon before they flip the house.

Also, our pricing power is not as strong as it has been in the past, in many years.

So I think we are still out there facing pretty much flat pricing.

Most of where we're coming from is, by being able to delete our incentives and our sales, so to speak.

We don't have nearly as many event-driven sales this year as what we had in the past.

We have had more of a level sales from the beginning of the year.

Got it.

And then just my follow-up question was on -- I know you have talked about the strategy of looking at more of a move-up buyer and shifting a little bit away from the first-time.

And I just wonder if you -- is that really because that is where the buyer segment is now?

Or is that a question more of where the land you are buying is now?

Can you talk about how that goes, moving forward?

It doesn't seem like underwriting is changing at all for buyers, especially the marginal buyer.

So do you think that shift continues, and the first-time continues to decline as a percentage of the overall volumes?

Well, I think that our move-up buyer segment will continue to increase as a percentage of our overall sales, as we move forward.

Also, as I mentioned earlier, we're very competitive with the custom builders out there who cannot get the financing.

Okay.

So the second part of it is, that the second-time buyer and that third-time buyer basically have a lot more to put down, and they don't have the challenging FICO scores that a lot of our entry-level buyers have.

So the down payment and the better credit scores help us meet that buyer demand a lot easier than the entry-level buyer.

And David, if you go back to prior to the downturn, our historic average mix had 35% to 40% of our buyers being first-time homebuyers --

Yes.

-- and a fairly equivalent number of move-up buyers.

I think what you're seeing in this shift, is a shift back closer to a more normal mix for us.

During the downturn, the first time homebuyer was a much larger percentage.

It got as high as 60% for us.

Yes.

And I think we're seeing a shift back towards a more normal mix now.

Great.

Thank you, and a great quarter.

Thank you.

Our next question comes from Michael Rehaut of JPMorgan.

Please proceed with your question.

Thanks.

Good morning, everyone.

(Inaudible) First question -- on the gross margins, I was hoping to get a little better sense for the guidance relative to what you put up this quarter, which was the best in quite some time, I guess two years or so.

I would think that with better volume, to the extent that there's obviously a little bit of fixed costs even in the gross margin side, you could do a little better potentially than the 17.6%.

So just wanted to get -- in terms of the thought process, if there were some drivers that you think might push it back to the range that you put out there?

Mike, as we talked about on the conference call, most of our sequential improvement was not necessarily from underlying strength and being able to raise sales prices.

It came from a change in our estimates, related to warranty and construction defects.

And so, when we're giving the guidance going forward, we are taking into account that, sequentially, we've seen very good sales, but we haven't necessarily seen a pickup in our underlying margins just yet.

So we've got a range that encompasses about where we were this quarter, but also allows for the core margin to remain about where it is.

In terms of volume, none of our margin is contingent on volumes.

Everything is house-specific and flows through cost of sales, is -- previously capitalized inventory until the home closes, it doesn't hit cost of sales.

Okay.

Appreciate that.

The second question -- Don, you had mentioned in your prepared remarks that you're going to be evaluating selected land acquisition and development, maybe picking up that pace going forward; also evaluating new submarkets.

So I was wondering if you could expand on that a little bit, from an inventory balance sheet perspective, even?

I guess a couple questions.

Where do you see -- to the extent that the improvement in the market backdrop continues -- where do you see the debt to cap going?

And also, the investment dollars going, in terms of inventory balance?

And if you could, give us at least, broadly a sense of which new type of submarkets you might be evaluating?

First of all, let me emphasize, that notwithstanding the fact that we are looking at some land and lot development deals, our business model still is a land light business model, and our focus is very strict underwriting guidelines on our development deals.

90%-plus of all of our deals -- development deals -- require that we get our capital back in two years or less.

There some outliers, but not very many outliers.

On a go-forward basis, where finished lots are not available at attractive prices, we'll continue to evaluate those land and lot development deals.

We have in the past, as you know, been a large developer, and we'll continue to develop where it's opportunistic for us.

And then, Mike, in terms of our balance sheet and how we're managing that, the pace of our investments in the land development and finished lots has increased.

Over the past couple of years, we had invested around $800 million in total.

This quarter, we invested a little over $300 million, so that pace has increased about 50% from where the pace had been.

But so we are seeing the opportunities to increase that pace in response to our improved sales.

But all of those investments will be done within the constraints of where we want to keep our balance sheet targets and our liquidity targets.

We still expect to maintain a strong balance sheet.

Our target is to still keep our net debt to cap down below the 40% to 45% range.

Clearly, we have a lot of room on that today.

And this is really just reflective of how we've prepared this Company for the ultimately recovery in the housing market.

We've generated a lot of cash during the downturn.

We paid off a lot of debt, and we have a lot of cash on our balance sheet.

So we are in very strong position to be able to reinvest in our business now, as we see the opportunities.

And I think especially, relative to our peers, I think our debt to cap and our net debt cap are extraordinarily strong, and permits us the opportunity to continue to aggregate market share from our competitors as well the custom home builders.

Great.

Thank you.

Our next question comes from Dan Oppenheim of Credit Suisse.

Please proceed with your question.

Thanks very much.

Was wondering, Stacey -- you talked about the lower backlog conversion rate going forward, given the more limited spec inventory.

What about the other side of that, in terms of margins?

Do you think there's any positive impact on margins from having fewer spec sales coming through?

There certainly could be going forward, which is why we gave a rather wide range, with the high end of the range above last quarter's margin.

It essentially includes this quarter's margin.

And I would also say to you, from our construction cycle perspective, we are starting and finishing homes at a much faster pace than what we have, especially during the hot markets of '04, '05, '06.

So as a result, notwithstanding the fact that we are down to 50% of specs, we can build them quickly.

And a number of our buyers are coming into our models today -- which is a good deal for us -- and that is, requesting build jobs, so that they can get their house their way.

And as you evaluate our gross margins, you clearly find that, that's an opportunistic position for us.

And that's a little bit reflective of the change in our product mix.

As our sales mix shifts more from first-time home buyer to move-up buyer, you are seeing our spec mix shift with that, as we see more build-to-order jobs.

Great.

Thanks.

And the second question then -- wondering about -- you talked about looking for land and [essentially] different submarkets, as you think forward into '13 and '14, what are you thinking, in terms of just what you want to be doing in terms of the aim for community count growth over the next several years?

Our goal is to continue to grow our community count.

And we are out there aggressively adding new subdivisions in each one of our four regions.

And I think relatively -- relative to our peers -- have added more new deals than any other builder in the marketplace today.

So our game plan is to continue to grow where growth makes sense.

But I don't want to get focused on so much the growth, because the one thing we've done is, we've gotten our debt down.

And we still have work to do on our gross margins.

And our goal is to try to get our gross margins up to the 20% level.

So we still, as you can tell, from the guidance we're giving you, which is a 16.5% to 17.5% for the second half of the year, we still have goals that exceed our current margin.

So growth is important, but profitability is more important.

And, Dan, just one clarifying point in terms of our active selling communities -- our selling communities were flat sequentially from December.

They are down 6% year-over-year, which reflects some of the activity that we talked about in the second half of last year, as far as cutting out underperforming communities.

And so we've accomplished that.

But we are actively adding new communities today, and would expect that to increase sequentially going forward.

Great.

Thanks very much.

Our next question comes from Ken Zener of KeyBanc.

Please proceed with your question.

Good morning.

Good morning.

You talked about the sales trends in April being solid.

Could you clarify that, relative to the 2Q rate we saw at 19%?

Very similar.

It continues to be strong.

And then the -- related to the community count, which was down 6%, do you -- please feel free to give us your community count if you have it?

However, it seems that the absorption pace would have increased on the order of 20% to 25%.

Can you talk about why that's occurring, what the dynamics are?

If it's a better location, intentional strategy to drive volume through fewer communities, and to quantify your community count increase?

Is it going to be at single digits, or is it a bigger ramp into the back half?

Thank you.

Well, clearly, one of our focuses has been to penetrate our existing subdivisions deeper.

In other words, to increase our net sales per subdivision per community, because that is an optimum position for us.

The key is, we've culled a number of subdivisions that weren't performing.

But most importantly, and from the majority of the instances, we've gone back and reworked our pricing and our takedown schedules on our option deals to enhance the performance of those communities.

So I think it's a wonderful thing that we have increased our absorptions per community, because they were a little low in our estimation.

The other thing I think that you are seeing -- and I've read it in several analysts reports, and we've kind of referred to a couple times here -- the other opportunities for home buyers are smaller than they were.

There aren't as many other builders offering new homes.

So you're seeing a disconnect, in terms of the national new home data, and what you're actually seeing in terms of the large public builders as we're taking market share.

Okay.

And then, your closings this quarter -- obviously there is a different variety of ways to think about or forecast, but you were very specific.

Was -- in terms of -- its conversion rate.

Was weather the factor that led to the higher volume of closings?

Ken, I'd say the number one reason was our reduction in our spec count.

We have reduced our specs from 56 to 50, so there was a focus.

I would say that, in general, our closings exceeded our expectations for this quarter, a bit.

We didn't expect to convert quite this high; but I think it was mainly driven by specs.

Weather in a certain point of time always does have some effect, but largely we view it as driven by our specs.

We don't like to blame weather for our lack of performance, nor do we like to give weather credit for our over performance.

(Laughter).

The real issue is, strongly, that our people are outperforming everyone in the industry.

And they executed the business plan that we put forth to them six months ago, and they are exceeding their business plan.

So no weather here.

Thank you.

Our next question comes from the line of Nishu Sood of Deutsche Bank.

Please proceed with your question.

I wanted to follow up on some of the earlier questions about future growth plans.

I know you mentioned that you would like to increase your community count, and that's what you're aiming.

But if I look at the 6% year-over-year decrease; if I look at your balance sheet with the super strong 17% I think you said, net debt to cap against the 40% to 45% longer-term target you have; I think you could argue that you're still taking a somewhat cautious approach.

So, at some stage in the future, the headroom you have on your balance sheet argues that you would put that to work, and expand investment and community count growth into recovery.

So I just wanted to drill in with some specificity on what do you need to see, to really press down the accelerator a little bit harder?

You mentioned gross margins.

Is that what you're waiting to see?

Are you waiting to see that you can consistently maintain your gross margin before you really begin to flex your balance sheet into the recovery?

Frankly, we are waiting for a lot of things.

Let's not forget the -- I used to say that someone flipped the switch February 1 on our buyers.

I think frankly, they just increased the rheostat slightly, and we have had higher traffic in our communities, and we have had higher sales.

I don't think that you need to worry about our community count, because the one thing that we can do is we certainly can increase our community count rapidly.

The thing that we are looking at in general, though, is if you look at the macroeconomic situation in the US, I don't see very much, if any, job growth out there currently.

And job growth is clearly what drives our business.

So we have a country that has a tremendous amount of debt, and we still have a lot of unemployed people in this country, and a lot of underemployed people.

So what we're looking for is a general increase in the macroeconomic conditions in the US before we start to become overexuberant.

We're three months into this.

And are we ecstatic?

Yes.

But we're not overexuberant.

And specifically, in our business, we're on the front edge of seeing some early indications on a number of factors that could be improving.

But again, this is only two months into a selling season, and that doesn't necessarily make a trend.

Improving absorptions, slightly improving [can] rates, and some improvement in sales prices in margins -- those are certainly good indications, but we're only early stages of that.

And then with all that being said, if you look at our option lots positions since September, we've grown the number of lots we have under option by 8,000.

We've increased our owned lots by about 1,000, and we have spent more money this quarter than we have in the recent past on land and lots.

So, even with all the caveats, we're feeling better about our business overall.

Thanks.

Great.

That's very helpful.

And then second question -- through all of the noise about the FHA last month, I think one of the interesting things that emerged was that a breakdown of that government loans figure -- I think you said it was 57%, and the VA is probably running at, let's say, 15% or 20% of that.

So probably higher than what most investors have thought that VA percentage might be.

So I wanted to get your thoughts on that going forward?

What does it tell us that the VA percentage is so high?

Is that a sustainable percentage as well going forward, as the housing recovery continues?

In other words, is the VA going to be able to support growth at that continued 15% to 20% of volumes range?

The VA percentage has been fairly consistent for us over time.

Whether it's sustainable -- I'm not sure I know the answer to that.

But over time that's been a fairly consistent percentage.

As far as our overall business percentage in FHA and VA combined, that's actually down year-over-year.

So at 57%, that's down a bit from where we have been in the past.

And the real number on that is, 20% is VA and 37% is FHA.

Our next question comes from the line of Stephen East of ISI Group.

Please proceed with your question.

Thank you.

If we just stayed on the FHA for a minute -- we had some insurance that went into effect; and then we also have sitting out there, potentially seller-financing concessions.

One, do you think there was any impact from the insurance going into effect?

And two, as you look at this potential seller-financing concession change, do you see that impacting your business?

And if so, how much?

I think we didn't see a big impact, Steve, on the mortgage insurance change coming into play.

And on the seller financing limits, as they come into play I think it may elongate the time for some buyers to accumulate more of their cash required to close the transaction.

But I think that's a one-time event that will shift some buyers to later periods.

I can't tell you we have quantified that real strongly right now.

The proposed changes take the cap on the seller contributions toward closing costs from 6% down to 3%.

Our average right now is closer to the new proposed cap.

So we don't ever start offering 6% closing costs.

So it might impact some of our marginal buyers, but overall, it's not going to be a significant impact.

Okay.

That's really helpful.

And then, if I look at two different issues -- one, are you seeing any cost inflation out there?

And if so, what type of impact is it going to have this year on your gross margin?

And then, two, your Texas growth was modest, relative to the overall growth.

Could you talk a little bit about what's going on there?

Well, I think Texas, obviously has been a -- I don't think, I know -- it's been a strong market for us, for even all through the downturn.

And frankly, as we have some of our other markets kick in, it's less of a percentage in terms of our growth on a go-forward basis.

But Texas, let me assure you, is strong; and we're continuing to expand our footprint in all of our Texas markets.

I would say to you on the cost side, clearly, we are receiving cost pressures.

We're negotiating those as strongly as we can.

One of the difficult things is, obviously, as we have begun to report a profit, then all of a sudden our suppliers and vendors begin to realize that we are making money.

But the bottom line is that, that we still are not as profitable as we like, and we are also starting more homes than anybody else in the country.

So as a result, we are very competitively pricing, and bidding everything that we've got going forward.

And we want to work with our suppliers and our vendors, but we still have a lot more to accomplish at D.R.

Horton.

All right.

Thank you.

If I could ask one other, on the DTA that you talked about, you talked about moving into profitability on a three-year.

If I look at the trailing 12 quarters, you're already there.

Is there something else you're looking at, before you bring the DTA back onto the balance sheet?

On a simple pre-tax income basis, all-in pre-tax -- consolidated pre-tax income basis -- we're not quite there yet.

We're at about $200 million loss on a three-year trailing basis right now.

But we do see that -- we do see us getting out of that position sometime before the end of the fiscal year.

That is one of the major factors, clearly, that goes into the evaluation, but it's one factor.

Obviously, we want see ourselves deliver our backlog strongly the rest of this year.

We want to see our sales continue to be strong, our pricing to remain stable, our margins to remain strong, profitability levels remain good as well.

And then, we also then look at the rest of the industry conditions, as well as general economic conditions and the mortgage markets.

So all those things are will go into the mix, in evaluating when we feel confident that, that asset can come back onto the books, ultimately.

But it's just a matter of timing.

And ultimately, it's just a journal entry.

(Laughter).

It's just a balance sheet entry.

It will not change our cash position one bit.

And so, when it happens, it will happen; whether that happens before the end of our fiscal year or not.

It changes a few metrics, but ultimately doesn't change our business one bit.

(Operator Instructions).

Our next question comes from Joshua Pollard of Goldman Sachs.

Please proceed with your question.

Thanks.

This is Anton for Joshua.

With the higher share of your late 2009, early [2000] land being developed, and your early '10, early '11 share increasing, how different are the margins here versus what it is rolling off?

Yes.

Clearly, the margins on more recent land purchases will typically be a bit higher than land that we purchased earlier.

In '09, the market was still struggling some.

And so, some purchases we would have made in '09 may not have performed at the levels that we expected, if conditions deteriorated.

And the more recent purchases are more in line with where the market conditions are today.

I don't have numbers in front of me to be able to quantify the difference.

But clearly, more recent purchases that we've been able to evaluate with our current cost structures and with the current market conditions would have better margins.

Okay.

Thanks.

What, if any, changes in orders or cancellations did you see during the first week of April, when there was a noise around the FHA requirements?

And could you also talk about how the mortgage company is planning for, when the things are again, re-implemented, come July?

We haven't seen any real changes in our cancellation trends here in April.

And -- I'm sorry, I didn't quite pick up the second half.

And the second part was, how would we prepare to respond to the FHA changes?

And it's going to be business as usual, and we'll just be working with each customer with the available loan guidelines that are out there.

One benefit we have at D.R.

Horton is, we have what we call our Home Buyer's Club, and we work very specifically with people who have credit challenges.

And help them plan for homeownership, whether it is cleaning up collection items on their credit report, establishing a payment plan for that, improving the credit score, or just establishing a savings plan for their down payment.

And frankly, over the last four or five years, we've worked through a lot of changes in underwriting guidelines, increases in FICO scores.

So our job is to go build a product, and adjust to the market, whatever the financing is.

Thank you.

Thank you.

Our next question comes from the line of Jade Rahmani of KBW.

Please proceed with your question.

Thanks for taking the question.

Just a clarification -- on the gross margin, was about 30 basis points of the sequential improvement related to the $2.4 million in Chinese drywall?

And then the rest of the variance was on lower construction warranty estimates?

And then, regarding those lower estimates, was any of that a true-up that would impact future periods?

Or is this just going through -- is this what explains the higher margin guidance you gave for coming quarters?

Yes.

The $2.4 million reimbursement does equate to around 30 basis points.

We did have some additional insurance recoveries during the quarter as well that contributed to that.

So the remainder of the 80 bps isn't entirely due to changes in estimates -- I believe it's -- about 60 basis points were based on total insurance recoveries, and 20 basis points were from a change in estimate.

And the changes in estimate, relative from quarter to quarter, do fluctuate somewhat.

But the largest contributor this quarter was our insurance recoveries.

And frankly, that's reflective of our attitude in our process at the corporate office of pursuing insurance recoveries based upon our insurance policies.

And the drywall -- Chinese drywall -- I know that we told you on previous conference calls over the years, that we're going to aggressively pursue that.

And we have, and we've had some nice accomplishments.

And we do continue to pursue additional reimbursements.

Okay.

Thanks for that.

And then, when we think about your incremental margins, if you look at the improvement in operating margins that we saw this quarter, versus the 5% sequential revenue change -- is there a rule to think about?

Or some way you could help us formulate what potential operating leverage is going forward on incremental revenue growth?

Thanks very much.

Generally, when we look at our incremental revenue growth, at least in the short-term, we look at SG&A as a variable component.

And typically, our SG&A variable component will be somewhere in the 4% to 5% range of the increase in revenues.

So in the short run, that's probably a rule of thumb to use.

Over the longer term, there would some additional SG&A that would need to be built to support a much larger volume level.

But the SG&A leverage is the biggest portion of any leverage that we get from our growth.

And frankly, we're controlling our SG&A very nicely, and we are very judicious in our new hires.

We want to make sure that the business -- the earnings are growing before we add the overhead.

Our next question comes from the line of Joel Locker of FBN Securities.

Please proceed with your question.

First of all, I guess in the Midwest, orders up almost 50%.

I know it's not a large region for you.

But was that based mostly on absorptions or just maybe a rise in community count, or counter trend in the Company?

That's primarily based on absorptions off of a fairly low base a year ago.

Right.

And just on a percentage of buyers in the second quarter that had experienced a some kind of short sale or foreclosure in the last two or three years, what percentage or do you have a rough number on that?

We don't have an exact number, but I can tell you as we visit with our salespeople across the country, there are more and more of those people who are becoming available.

That's the -- I believe it's a three-year span.

And those buyers are coming back into the market.

Right.

Would you say that's significantly more than a year ago on a percentage basis?

Yes, I would.

All right.

That's it.

Thanks a lot.

Our next question comes from the line of Megan McGrath of MKM Partners.

Please proceed with your question.

Good morning; thank you.

Good morning, Megan.

Don, just to try to summarize, listening to your opening comments, and then your answers to the Q&A -- is it fair to say your view of the overall market is that the housing market in the US is flattish to stabilizing, and most of your growth is coming from market share gains?

Yes.

Okay.

And then, is there anything you are looking for?

You have had a great read on the market in the last couple of years.

Are you still expecting overall US housing to be flattish this year?

Or do you think that we are a little bit better than that now?

I think will be a little bit better than that, but not significantly.

And again, you are right.

Basically, we continue to aggregate market share across the country, as well as to drive down our directs, as well as keep our SG&A low so that we can offer a quality, very competitively priced product in the market.

And I also want to continue to emphasize is that, that move-up buyer is helping us grow our market share.

Great.

And then just a quick follow-up on the DTA.

It sounds like from your comments that -- I don't know if this is what your accountants have told you, that the DTA could come back onto the books in pieces, gradually?

By and large, it will come on in one piece.

When you get to the level of confidence that you believe the asset is recoverable, by and large, it should come on in one piece.

The only exception to that, will be to the extent that a portion of our NOLs that we are carrying forward relate to certain states, in which the carryforward periods may be rather short.

There may be some portions of our state NOLs that we may not feel we would fully recover.

So there could be some portion that could be left on the balance sheet, or the valuation allowance could be remaining for those portions.

Okay.

Great.

Thanks.

Our next question comes from Jay McCanless of Guggenheim Partners.

Please proceed with your question.

Good morning, everyone.

First question I had, just going back to the FHA seller concessions -- can you all discuss how easy or how difficult it would be to transition somebody who might qualify under the old concession rule over to, say, a conforming mortgage with mortgage insurance behind it?

The challenge there is -- and if you're looking at simply the seller concessions -- if you're looking at contributing 6%, you are probably working with a buyer who doesn't have a significant amount of cash at closing.

And FHA down payment is 3.5%, where a conventional mortgage is going to be at least 5%.

So I'm not sure that trying to transition that person to a conventional mortgage fully addresses the cash situation of that buyer.

And that's where we would work with the buyer then, to help them understand exactly what's required, in terms of cash at the point of closing.

Okay.

And then, my second question -- just was wondering, with the decline in the [can] rate year-over-year, is that a function of scrubbing potential buyers more closely now than you may have in the past?

Or is that a function of the shift into more move-up housing, and move-up buyers who are bringing more cash, more equity to the table?

If you could discuss that, I'd appreciate it.

Thanks.

I think clearly the shift into the move-up buyers, we are experiencing more buyers who are bringing more down payment to the table, especially in markets like California where a number of our buyers have 20% down payments.

I think, generally, the answer to your question, specifically on whether we're changing the way we are scrubbing our backlog -- absolutely not.

Standard procedure, basically no changes whatsoever.

Okay.

Thank you.

Our next question comes from Mike Widner of Stifel Nicolaus.

Please proceed with your question.

Good morning, and congrats on a solid quarter again.

Thank you.

I'm not the smartest guy on the block.

I was just hoping you could clarify once again for me, on some of the one-timer kind of things that were included in the margins.

And if I understood you correctly, it was about $2.4 million or 30 basis points in a drywall settlement.

And then you had mentioned 60 basis points in insurance recoveries, so roughly $5 million or so.

So is it fair to say that between the two of them you have 90 basis points, give or take, that was kind of one-time in nature?

And then I would presume that the changes in estimates that you had talked about would be sort of an ongoing thing?

Yes.

When we've been talking about the recoveries, we've been speaking about the sequential change.

And so, of our sequential change of 80 basis points from Q1 to Q2, about 60 basis points of that is coming from the reimbursement, which -- it is around $5 million in total, of which $2.4 million related to Chinese drywall.

The remaining 20 basis points, the remaining change, is something that's just ongoing.

There is always some fluctuation from quarter to quarter, based on activity in terms of our costs, activity in terms of -- just the way some of our costs allow, and the way we have to adjust our estimates.

And frankly, that's one of the reasons why we're indicating to you that we don't see a lot of pricing power available in any of our markets out there today.

There are a few, but not many.

And secondly, why we led you to our 16.5% to 17.5% gross margin expectation for the second half of the year.

Clearly, our forward expectations are to continue to improve gross profit.

But we don't want to mislead anybody as to what caused the sequential increase this quarter.

Great.

So, yes, you have been through cycle or two here and there, and you built a few houses over the past four decades or so.

Just wondering if you could talk -- not about what's going on right now, but from your experience, both on a regional basis, and now on a national basis, you had this big pullback.

And this happened in the past again, on a regional basis.

I'm just wondering if you've experienced the phenomenon before, where at the bottom, where a lot of the private guys are still reeling, and they don't have access to the balance sheet capital that you do, that you have that opportunity to -- you've got the land, you've got the capital, you've got the ability to steal share at the bottom.

But as things progress, as those guys watch you stealing their market share, I'm wondering how the challenge of them wanting to get back into the market, and them watching what you're doing, and figuring that it's time to start opening communities ourselves.

I mean, how does that play out with your simultaneous hope to increase margins?

It seems like it would be very difficult to both increase margins as you hope to do, as well as continue to increase market share, as those guys are seeing that demand is coming back, and trying harder to get back into the game themselves?

Just wondering if you could talk about how that has played out in the past on a local basis?

Well, I think, frankly, this time around, the private builders have been devastated more than they have been devastated in any previous downturn.

And this is -- Horton and I's fourth downturn in the industry.

I don't see the banks stepping up to lend money to those people today.

As a matter of fact, I see just the opposite.

So I look at our markets, and our submarkets across the country.

And the one thing that is consistent amongst almost all of those markets is that there are fewer and fewer private builders out there who, one, are alive.

And two, if they are alive, that can actually get a loan from a bank, who doesn't want to loan them any money.

So I think this is a unique downturn.

It has been unique for Don Horton and myself.

This has been the worst downturn in our almost 29 years together.

I see an opportunity for us to continue to take market share, not only away from those small- and medium-sized undercapitalized private builders.

But I also believe and know, for the very first time in our Company's history, that we have an excellent opportunity to continue to take market share away from our public competitors, who I perceive are way overleveraged to us, and permits us an opportunity to continue to aggressively take market share away from them.

Our next question comes from Stephen King of Barclays Capital.

Please proceed with your question.

Actually it's slightly less name, it's Stephen -- it's Steve Kim from Barclays.

Congrats on a good quarter.

Question I had for you relates to your comment about not putting through price increases in most of your communities.

But then also talking about positive mix shift.

I was curious as to whether or not the land that you are building your move-up product on, is substantially the same as the land that you may have been building more of the entry-level type product on, let's say, last year or the year before?

Because it would seem to me that if you're able to put a richer mix on a similar land-base, that would be almost as good as a price increase.

But if you could just answer that broadly, that would be great.

To answer your question directly, we are not putting a more expensive house on the same price, as our entry-level lot prices.

So there's no real benefit there.

As we continue to expand into that entry-level market, we're paying more for those lots than what we are paying for our entry-level products.

So there's really no enhancement there.

And I would say, the other thing about the pricing that we can't forget, in terms of pricing power, is that one of still, of major issues facing our industry are appraisals.

And notwithstanding the fact that we believe that we have a justification to raise prices on a number of our markets, those pricing increases are slowed, simply because of competitive appraisals throughout the US.

Got it.

Second question I had for you relates to your comments about margin.

If you could share with us a little bit -- I'm sorry, not margin, but community count -- if you could share with us a little bit your view of how the community count is going to likely trend as we head into next year?

You were talking about down 6% today, but your sales have also been better than expected.

So I imagine if you been closing out on more communities than you otherwise would have expected, let's say, late last year.

Today, given that you're looking at a better sales profile and you have the balance sheet with which to grow, would it be unrealistic of us to expect that, if sales trends continue, and you burn out of the same kind of rate that your burning out today, that your selling community count could be up double digits next year?

Well, I hate to put a number on that, Steve, because, really, what we've done and what we're going to, we have a Division Presidents meeting here in Las Vegas next week.

And we've expressed to our divisions and our four regions, our growth expectations for them in '13, '14, and '15.

So basically what they're going to be doing is going out and finding lots and land positions in order to meet their respective growth expectations that we have here.

So I don't see -- it could be a double-digit; it could be a single-digit.

But let's remember one thing -- the best thing that could happen to us, is to continue to achieve higher sales and higher closings out of our existing communities.

Because certainly we have enough lots in our communities; we have enough lots on our books; and to the extent that we can penetrate those existing communities deeper, then that's better for us on an SG&A component and a gross margin component.

And as we look to invest, and as we look to grow, certainly we want to grow incrementally.

But as long as we also stay disciplined as far as how we invest, stay disciplined on our land supply, and on our return thresholds; so on a project by project basis, that's what will improve our Company, not simply focusing on the top line growth.

As I've said earlier, our focus is on growth, but our bigger focus is on profitability.

We need to continue to grow our gross margin and our pretax income percentages.

Great.

Thanks a lot.

Our next question comes from Alex Barron of Housing Research Center.

Please proceed with your question.

Thank you.

Good morning, everybody, and good job on -- well, not just this quarter, but I guess over the last several quarters in getting to profitability a lot earlier than everybody.

Thank you, Alex.

My question is -- we've seen a strong improvement in the orders in the last two, three months as you mentioned, or 2.5 months.

And so my view is that, a lot of communities have started to perhaps sell out earlier than expected, which I guess is a good problem to have.

But my question is, are you also starting to see some cost pressures?

And perhaps are you thinking you should accelerate your land purchases earlier?

And are you starting to see cost pressures from materials and labor and land prices?

Well, we've consistently seen cost pressures from the land and lot side, as well as, most importantly, our subcontractor and our vendor base.

So it's a division by division -- as we call it, release by release -- bidding process, an aggressive bidding process.

As I've said earlier, we are building more homes and starting more homes than anybody in the US.

We bid every release.

We want to make certain that we have the most competitive pricing at that point in time.

We're going to have commodities going up, and we're going to have labor going up.

But the bottom line goal has always been at this Company, is how we balance those with increases and decreases such that we end up with the most competitive directs in any market.

Again, our size and our number of starts, I think, leads us to a very competitive position relative to our peers.

As I travel the country, I just don't see a lot of our peers, even today, starting a lot of houses.

So we are the preponderance of starts in most of our markets.

Right.

Absolutely.

My other question was -- if you start to see the number of buyers remain at a strong pace, is your view more towards just taking the volume on a per community basis?

Or is it more to raise the price, and put an upside on the sales per community?

And related to that, what are your views on selling homes to investors?

Well, frankly, over the last five years, we would sell a home to anyone.

(Laughter) Frankly, what we are focusing on is selling homes to families who are not investors; basically, people who are buying homes for a good place to raise their children and send their children to school.

And we're always looking to try to strike the best balance community by community, between driving additional volume and improving our prices, or reducing our incentives.

Sometimes we're constrained by appraisals in a submarket, but in general, we're trying to strike that best balance.

Right now, we clearly would love to see more absorptions per community.

But we want to see that with some improving dynamics, in terms of our incentives and our pricing as well.

Clearly, we can grow the business from a number of different aspects, whether adding new communities, whether rolling options, whether we are penetrating our existing communities deeper, or whether we're developing land and lots.

We have got a whole wide expanse out there of opportunities.

We just hope that the sales and the closings continue to be what they have been since the first of February, because that will provide this Company, really the preeminent opportunity in the industry to continue to grow profitably.

All right.

Great.

Thanks.

Our next question comes from Bob Wetenhal of RBC Capital Markets.

Please proceed with your question.

Hi, this is [Desi] filling in for Bob.

Thanks for taking my question.

You're welcome.

You said your capture rate was 60% for the quarter.

Can you talk about your experiences with home buyers who chose to go with a different mortgage lender, and how that impacted the cancellation rate in the quarter?

And whether you expect the capture rate to increase going forward?

Since we have a very strong capture rate with our captive mortgage company, we really haven't noticed a substantial impact on our aggregated closings in any given quarter because of any fallout from other mortgage companies.

Typically, if we're not working with DHI Mortgage in a given market, that division will be working with other preferred lenders, and have a tight working relationship to manage the backlog through.

So we haven't really had that kind of a falloff in our Businesses.

And I think as Stacy mentioned earlier, as I asked the same question in our pre-conference call, our 60% capture rate has a lot to do with the fact that our mortgage company is also pursuing noncaptive business.

So sometimes those numbers are skewed slightly by the number of noncaptive buyers they solicit, and are able to garner in a specific quarter.

And since our cancellation rate actually improved this quarter, down to 22%, we're not running into any significant hurdles even with our outside lenders right now.

All right.

Thank you.

I appreciate that.

Thank you.

Our next question comes from Timothy Jones of Moloney.

Please proceed with your question.

Morning.

Good morning, Tim.

How are you?

Okay.

Other than orders, D.R.'s favorite number is SG&A to sales, I believe.

And you did keep your SG&A flat with $200 million increase in sales, and brought your margins down 4%.

But there is still 13.7% -- which is, even for this quarter, probably 250 basis points up, I think your norm.

Is it that your -- is it still high because you're expecting a further improvement in upcoming months?

Or are you getting hit with an abnormal amount of sales by realtors, where it costs you about 3% versus 1.5% internally?

We haven't talked in a while.

And I guess it's just the -- as Todd Horton says so eloquently, no good deed shall go unpunished.

(Laughter).

We continue to have some of the lowest SG&A in the industry, and we include our corporate overhead in our overall SG&A, but we still get questions about our SG&A.

But to answer your question directly, yes, that is a focus of D.R.'s.

But I'll let Bill, perhaps, answer your question, since I really just didn't answer your question.

And year-to-date, our SG&A is 13.5% of revenues.

That is higher than our long-term target.

Our long-term target is to have it as close to 10% as we can.

There's a lot of targets that we are not quite at today.

We're not at our normal margin rate either.

So we have certainly kept our some level of SG&A infrastructure that will support some higher volume, as evidenced this quarter when our closings were up 21% and SG&A was up only 3%.

We have also maintain our footprint across the United States.

We haven't exited a lot of markets.

And so we are well-positioned to be able to grow and leverage that SG&A.

We expect, as we are able to reinvest in the business, use some of our cash to grow our business, we will leverage that SG&A, and it will drop as we grow.

And hopefully, we can get it back closer to that long-term target of 10%.

And I think Bill makes an excellent point there.

If you look at everyone else's footprint, most people have shrunk their footprint much more dramatically than we.

And our goal all along was, keep our footprint the same, but then take down our multiple divisions in each one of our various markets to the lowest common denominator that we could get to.

But they're ready to grow.

One clarification, too, Tim, for D.R.

Horton, the external sales commissions are actually in our cost of sales, not in our SG&A.

And I just want to know if D.R.

put you up to that question?

(Laughter).

No comment, but I am in contact with your Company quite often.

(Laughter).

And secondly, where is your warrants?

I mean, they are still outstanding, aren't they?

Where are they on the balance sheet?

Our convertible debt?

Yes.

Yes, it is in our debt.

And the current carrying value is around $432 million.

It's still in your debt?

Yes.

$432 million is in our debt.

The face value of those notes is $500 million.

So the remainder of $68 million is in equity today, and that's the value associated with the convert.

And that is being accreted, each quarter, out of equity and into debt.

So by the time that debt matures in 2014, we'll be at $500 million of debt on the balance sheet.

Well, you could turn it to cash tomorrow.

It's in the money.

Well, it's not callable, in advance of the maturity date.

So we can't make that decision or that transaction until 2014.

But clearly -- (Multiple Speakers).

-- worry about it.

-- yes, the price is $13.06.

The strike price is $13.06, so as long as we --

And what's the --

-- take care of business here, we should be in good shape.

And what's the interest rates on it?

2%.

I'll take it.

Yes.

I think you can buy it on the open market.

I mean, I'll take it from your side, not my side.

It is trading at a significant premium.

Our next question comes from line of Michael Rehaut of JPMorgan.

Please proceed with your question.

Thanks for letting me in on the followup.

Just wanted to go back to the idea of spec being a little less in your backlog, I believe, than previously.

Is that just purely driven by the shift a little bit more towards move-up?

Because I think all else equal, you wouldn't necessarily be moving away in any regard from your spec approach in the market?

Actually, it's interesting you asked that question, because it's really due to our more conservative nature.

We started the quarter with 56% specs.

Our goal was to try to get that number reduced back down to closer to 50%, and we did.

So it's just a function, I believe, of largely not having started as many homes as we could have started, simply because our spec ratio was a little high, and we wanted see those specs come down.

And frankly, what happened was the spring selling season materialized, and that caused primarily a reduction in our specs.

But as I have said before, our construction cycles are currently some of the shortest in the history of the Company since I have been here.

And our ability to put a house on the ground and get it ready for a buyer is the best we've ever had.

We do typically see our spec percentage drop sequentially from December to March, because we do have homes started prior to the selling season, but then we sell during the March quarter.

But I think we did a little bit better job of selling through that this quarter than we have in the last few years.

And frankly, that has been a focus of both Bill Wheat, and Mike Murray, with our division presidents and our regional presidents, clearly identifying who needed to move what aged inventory, at what point in time.

And they actually, over the last quarter, did an excellent job of that.

All right.

Thank you.

Our next question comes from Jack Micenko of SIG.

Please proceed with your question.

Thanks for taking the question.

Most have been asked and answered.

I did want to get your thoughts on land pricing, maybe quarter to quarter, year to year, in the markets that are working.

And wondering how much, the moving on this option, increasing the option mix over the last couple of quarters, moving to a higher trade-up mix over the last couple quarters -- how much of that strategy is tied to land pricing that you're seeing in the better markets?

Thanks.

Basically, I think that all of the lots that we're buying are more competitively priced than what they have been in the past.

In other words, I think that the land sellers are trying to get more for the lots than what they had two years ago and three years ago, because there has been some semblance of improvement in the industry.

So I think we are going to continue to fight that on a go-forward basis.

One of the things that helped keep a lid on that though, is the land prices are constrained by what we can sell the home for.

And so when we're targeting a specific gross margin and return on our investment, and we know what our fixed costs are, basically, there is a residual that we are not willing to pay above a certain dollar for the land.

And it's further constrained by the fact that we have still appraisal issues across the country.

So as, again, I say, there's not a lot of pricing power in the industry today.

Thanks.

Thank you.

There are no further questions at this time.

I'd like to hand the floor back over to management for closing comments.

Thank you very much.

Again, I thank all the DHI employees who clearly turned in an outstanding quarter.

You continue to outperform all of your peers, market by market, and subdivision by subdivision.

And we look forward to a very successful second half of fiscal year '12, and look forward to a profitable years ahead.

Thank you very much.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.