Why Century and Meritage ended Q3 with too much inventory

Last week, we wrote that Q3 2026 results would show which builders adopted a cautious approach to inventory, and which ones had elevated levels of homes under construction and would likely need to increase incentives to reduce inventory before year-end.

The third-quarter results show that many builders were caught off guard by the abrupt slowdown in demand in September, which has continued through October. This left them with excess inventory at the end of the third quarter, requiring even higher incentives and price cuts to reduce inventory before year-end.

Among the public builders, Century Communities and Meritage have stood out (based on their homes under construction and backlog levels as of the end of Q2), and their Q3 results also showed concerning levels of homes under construction relative to backlog.

Consistent with elevated inventory and the need to drive volume with incentives, Century noted that it expects incentives to increase by an additional 2-2.5% of the average selling price in Q4, compared with Q3, when incentives already represented 13% of the average selling price.

We see risk that this estimate may not go far enough, given the challenging absorption trends in September and October, with any homes closing before the end of the year likely needing to be under contract by the end of November.

Century stressed that it had slowed its starts to match demand, but still started more homes (2,502 starts in the third quarter) than it received in orders (2,284 orders in the quarter).

Meritage emphasized preserving margin rather than pursuing a higher sales pace in the third quarter.  While the company diligently reduced its specs per community over the past year and ended Q2 with 15 specs per community, we estimate specs per community moved slightly higher in Q3, potentially ending the quarter at around 16-17 per active community, or approximately 5,700 specs in total for the company.

In the olden days, when meaningful backlogs were a “thing,” most builders had ratios of homes under construction to backlog value of approximately 1x, or even lower for to-be-built builders. In the current market, with most builders generating most sales from spec inventory, this ratio rises as builders add spec inventory without a backlog.

As a result, most builders are now closer to a ratio of 1.2x to 1.8x for homes under construction (at cost) relative to backlog value, whereas those taking a more conservative approach are at or below 1x.

However, both Century and Meritage remained above 3x in Q3: Century at around 3.7x homes under construction compared with backlog value (our estimate based on the overall inventory balance) and Meritage at 3.2x.

These higher inventory levels mean there’s no question that these companies have enough inventory to reach their closings goals for the year, but the question is how much they’ll need to offer in lower prices or increased incentives to generate those sales and settlements.      

Source: www.housingwire.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.