M/I Homes, Inc. (MHO) Q1 2022 Earnings Conference Call April 27, 2022 4:00 PM ET

Company Participants

Phillip Creek - EVP and CFO
Robert Schottenstein - CEO and President
Susan Krohne - SVP and Chief Legal Officer
Derek Klutch - President, Mortgage Company
Ann Marie Hunker - VP, Chief Accounting Officer and Controller
Mark Kirkendall - VP, Treasurer

Conference Call Participants

Art Winston - Pilot Advisors
Alex Barron - Housing Research Center
Jay McCanless - Wedbush
Jesse Lederman - Zelman & Associates

Operator

Hello, and welcome to today's M/I Homes First Quarter Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions]

I would now like to hand over to Mr. Phil Creek. Please go ahead when you're ready.

Phillip Creek

Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President; Susan Krohne, our SVP and Chief Legal Officer; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Chief Accounting Officer and Controller; and Mark Kirkendall, VP, Treasurer.

First, to address Regulation Fair Disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the company undertakes no obligation to update any forward-looking statements made during this call.

With that, I'll turn it over to Bob.

Robert Schottenstein

Thanks, Phil. Good afternoon, and thank you for joining us today.

We had a very strong first quarter, one of the best first quarters in our company history, highlighted by record first quarter revenues and net income and an all-time record ending backlog units and backlog value. We continue to operate against the backdrop of unprecedented housing conditions. On the one hand, we are experiencing some of the toughest construction and development challenges our industry has seen with persistent labor and supply chain issues combined with unanticipated delays associated with land entitlement and land development.

At the same time, demand for housing continues to be very robust. Although mortgage rates have increased considerably since the beginning of the year, demand for new homes across our markets remain strong. Many of the reasons behind the strong demand are well documented, including historically low inventory levels and an ever-increasing number of millennials moving to homeownership.

Moreover, the quality of our buyers continues to be very strong with average credit scores of 747 and average down payments above 16%. Basically, the quality of buyers that we're seeing in terms of creditworthiness is the best we've ever seen.

In terms of our performance, we achieved record first quarter net income of $92 million or $3.16 per diluted share, which is an 8% improvement in net income over last year's first quarter. We had record first quarter total revenue of $861 million, an increase of 4% from last year.

We closed 1,823 homes in the quarter, a 10% decrease from a year ago with an average sale price of $457,000, which is an increase of 16% an average selling price. Decline in closings was largely due to the extended cycle times we are dealing with because of the aforementioned construction, labor and supply chain challenges that have impacted our entire industry.

Pretax income increased 11% to $122.3 million, a first quarter record. Substantial growth in income was a result of a 40 basis point improvement in our gross margin over last year to 24.8% and our SG&A overhead expense ratio improving by 50 basis points to 10.5%.

Our Financial Services segment also contributed to our positive results for the quarter, with pretax income of $13.1 million. As a result, our pretax income margin improved significantly to 14.2%, and we achieved a strong return on equity of 26% during the quarter.

As mentioned, demand for new homes remains solid. We sold 2,514 homes during the quarter, a decline of 19% from the all-time record 3,109 homes that we sold during last year's first quarter.

In this year's first quarter, we sold 4.8 homes monthly per community, well ahead of our sales pace in any prior first quarter over the last decade with the exception of last year.

In terms of our sales, it's important to note that we are operating at 6% fewer communities than a year ago. And on top of that, we are limiting or capping our sales in nearly two-third of our communities in order to manage construction costs, deliveries and the timing of land development and lot availability.

Our Smart Series, which is our most affordable line of homes, continues to have a very positive impact on our sales performance. During the quarter, our Smart Series sales comprised nearly 46% of total company-wide sales compared to 35% a year ago and 36% in 2020. We are now selling our Smart Series homes in 44% of our communities.

As mentioned in previous calls, these communities often have more lots in total and in general, producing, on average, a greater sales pace, better gross margins, better cycle time and better bottom line returns. Company-wide, our backlog sales value at the end of the quarter was $2.8 billion, an all-time record and 17% ahead of the year ago. Our units in backlog increased by 1% to an all-time record 5,526 homes with an average selling price in backlog of $505,000, which is 16% higher than the average price in backlog a year ago.

Our financial condition is very strong, with $1.7 billion of equity at the end of the quarter, which is an all-time record, and that equates to a book value per share of $60. We ended the first quarter with a cash balance of nearly $220 million and 0 borrowings under our $550 million unsecured revolving credit facility. This resulted in a debt-to-capital ratio of 29%, down from 32% a year ago and a net debt-to-capital ratio of 22%.

Now I will provide some additional comments on our markets. We experienced strong performance from our divisions in the first quarter with substantial income contributions led by Dallas, Houston, Tampa, Raleigh, Chicago and Columbus. However, given that we are operating in fewer communities than a year ago and as I noted, that we are limiting sales in nearly two-third of our communities, new contracts for the first quarter in the southern region declined by 27% and by 9% in the Northern region. Our deliveries in the Southern region decreased by 13% from last year, and our deliveries in the Northern region decreased by 5% from last year. 58% of our deliveries came out of the Southern region to balance 42% out of the Northern region.

Our owned and controlled lot position in the Southern region increased by 12% compared to last year and increased by 4% in the Northern region. 1/3 of our owned and controlled lots are in the Northern region, the other two-third in the Southern region. While we are selling through communities somewhat faster than expected, we fully expect to open a record number of new communities in 2022 and in addition to further grow our community count in 2023.

We have a very strong land position. Company-wide, we own approximately 24,200 lots, which is roughly a three year supply. Of this total, 30% of the owned lots are in the Northern region where the balance is in the Southern region. On top of the owned lots, we control via option contracts and additional nearly 22,000 lots. So in total, our owned and controlled lots are [technical difficulty] which gives us significant flexibility to react in changes and demand or individual market conditions. At March 31, we increased our controlled lot position from a year ago by 9%.

Before I conclude, let me just state that despite the construction, development and supply chain challenges, demand for new homes remains very strong. And our financial condition is as solid as [technical difficulty] as we have noticeable operating momentum in nearly all of our markets.

Given our record backlog, our strong margins in backlog, along with our plans to open a record number of new communities this year, M/I Homes is very well positioned to have another year of strong results in 2022.

And with that, I'll turn it over to Phil.

Phillip Creek

Thanks, Bob.

As far as financial results, our new contracts were down 33% in January, down 12% in February and down 9% in March, and our cancellation rate for the first quarter was 7%. As to our buyer profile, about 54% of our first quarter sales were the first town buyers compared to 53% in last year's fourth quarter.

In addition, 44% of our first quarter sales were inventory homes compared to 45% in 2021's fourth quarter. Our community count was $1.76 at the end of the quarter compared to $1.87 a year ago. The breakdown by region is 94 in the northern region and 82 in the Southern region.

During the quarter, we opened 31 new communities while closing 30. During last year's first quarter, we opened 21 new communities. 2022, we plan on opening a record number of new communities and ending 2022 with about 200 communities. We delivered 1,823 homes in the first quarter, delivering 38% of our backlog compared to 46% a year ago. Our construction cycle times continued to increase during the first quarter. They increased by about two weeks from the fourth quarter of last year.

We're very pleased that we started 2,400 homes in the first quarter, up 4% compared to last year's first quarter. And in March 31, we had 5,700 homes in the field versus 4,500 homes in the field a year ago, which is up 25%.

Revenue increased 4% in the first quarter, reaching a first quarter record $161 million. Our average closing price for the first quarter was $457,000, a 16% increase when compared to last year's first quarter average closing price of $395,000. Backlog average sale price is $505,000, up from $443,000 a year ago, and our backlog average sales price of our Smart Series is $408,000.

Our first quarter gross margin was 24.8%, up 40 basis points year-over-year and up 160 basis points over our fourth quarter last year. And our first quarter SG&A expenses were 10.5% of revenue, improving 50 basis points compared to 11% a year ago. This reflects greater operating leverage and was our lowest first quarter level in our company history.

Interest expense decreased slightly for the quarter. We're very pleased with our improved returns for the first quarter. Our pretax income was $14.2 million versus 13.3% a year ago and our return on equity was 26% versus 25% a year ago.

During the quarter, we generated $135 million of EBITDA compared to $125 million in last year's first quarter. We generated $69 million of cash flow from operations in the first quarter compared to generating $75 million a year ago. We have $26 million in capitalized interest on our balance sheet. This is about 1% of total assets. Our effective tax rate was 25% in the first quarter compared to 23% in last year's first quarter. This increase in rate was due to the expiration of the energy tax credits for 2022.

Our earnings per diluted share for the quarter increased to $3.16 per share from $2.85 per share last year, up 11%. During the quarter, we repurchased 310,000 of our outstanding common shares for $15.4 million, which leaves $133 million available under our current repurchase authorization. And in the last three quarters, we have spent $67 million buying stock back, repurchasing 4% of our outstanding shares. Our current plans based on existing market conditions are to continue repurchasing shares.

Now Derek Klutch will address our mortgage company results.

Derek Klutch

Thanks, Phil.

Our mortgage and title operations achieved pretax income of $13.1 million compared with $19.7 million in 2021's first quarter. Revenue decreased 19% from last year to $24.1 million due to a lower volume of loans closed, along with significantly lower pricing margins due to increased competition for purchased business.

Loan-to-value on our first mortgages for the first quarter was 84%, the same as last year. 77% of the loans closed in the quarter were conventional and 23% FHA or VA compared to 78% and 22%, respectively, for 2021's first quarter. Our average mortgage amount increased to $377,000 in 2022's first quarter compared to $328,000 last year. However, loans originated decreased to 1,271 loans, which was down 19% from last year, while the volume of loans sold increased by 3%.

Our borrower profile remains solid with an average down payment of over 16% and an average credit score on mortgages originated by M/I Financial of 747. Finally, our mortgage operation captured 82% of our business in the first quarter compared to 84% last year.

Now I'll turn the call back over to Phil.

Phillip Creek

Thanks, Derek.

As far as the balance sheet, we ended the first quarter with a cash balance of $219 million and no borrowings under our unsecured revolving credit facility. Total homebuilding inventory at March 31 was $2.6 billion, an increase of $600 million from last year. Our unsold land investment in March 31 is $1.1 billion compared to $742 million a year ago.

March 31st, we had $721 million of raw land and land under development and $373 million of finished unsold lots. During the first quarter, we spent $94 million on land purchases and $101 million on land development for a total of $195 million, which was up from $163 million in last year's first quarter.

In the first quarter of this year, we purchased about 2,200 lots, of which 70% were raw. In last year's first quarter, we purchased about 2,500 lots, of which 75% were raw. We have a strong land position at quarter end, controlling 46,000 lots, up 9% from a year ago. This is about a 5-year supply.

At the end of the quarter, we had 75 completed inventory homes and 1,224 total inventory homes. And of the total inventory, 733 are in the Northern region and 491 are in the Southern region. In March 31, 2021, we had 98 completed inventory homes and 708 total inventory homes.

This completes our presentation. We'll now open the call for any questions or comments.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Art Winston from Pilot Advisors. Your line is open.

ArtWinston

For a great quarter under difficult operating circumstances. I was hoping you could describe your rationale if any, and you're thinking into only spending $50 million on the stock repurchase and $95 million on land, excluding land development, when it's - becoming more competitive to buy the land. And in effect, if you write your own stock, you buy your land allotted whether two-third, one-third discount from book value and two-third of what your cost based on the difference between book value and the share price?

Robert Schottenstein

Yes Art, let me take this an initial crack at that, and then I think Phil will probably add to it. First of all, clearly, we think it makes sense to buy back the stock and we're going to continue to, as Phil said, based upon current market conditions. I don't disagree with that part of the question in any way. Keep in mind too, that the land that we buy is not land that we just put in contract last week or even the week before or the month before.

Some of these contracts have been in effect for over two years and were entered into as far back as even late 2019 or early 2020. Some of them were entered into in 2021. We think that they are deals that make tremendous sense for our company, well located, help us achieve growth goals, well priced, the kind of locations that we think are very smart and important for us to be in as we move on down the road.

So and frankly, because of the age of some of those contracts in particular, we think they really make a lot of sense under current conditions. Phil, I don't know if you want to add anything to that?

Phillip Creek

Yes, Bob. I mean overall, we just continue to look where we think makes the most sense for us. We do want to own a two to three year supply of land. Today, we own about 24,000 lots and our run rate is almost 9,000. So within where we want to be. We did spend a little more money in the first quarter on land than last year, but the majority of that spend is land development, which helps us get these new stores opened.

We actually bought just from a purchase standpoint, as I said we bought about 200 lots in the first quarter, which was less than last year's 2,500. And we have bought back about 4% of the outstanding shares in the last three quarters. So Art, we hear you and understand what you're saying, we agree with you to some degree, we do plan on continuing to buy the stock back, especially when it's so much below book value. So that is something that we will focus on.

ArtWinston

If you don't mind making me a comment - our book value per share probably will approximate $70 per share at Christmas time. And if we look out 20 months to next - a year from Christmas, it should be like $80, which is half of the book value. And one of the easiest way to get returns on equity up is to reduce the equity.

And I think with $133 million authorization, and I think with over $200 million of unfed cash in the balance sheet and really extra borrowing power on top of that, that we're going a little bit too slowly, and we need a better balance between the buying land and we're being more aggressive in buying back the stock. You don't get these opportunities all the time.

And that's with appreciating the excellent job that you guys are doing and the excellent position that we have across the country, understanding that, but I was hoped that the Directors and you guys would just become a little bit more aggressive if you don't mind and that's it I mean I appreciate your response?

Robert Schottenstein

I think your point is very well made and it's something that we're taking a look at very carefully right now.

Operator

Let me now turn to Alex Barron from Housing Research Center. Your line is open.

Alex Barron

Yes gentlemen, and good job on the quarter - yes, I wanted to focus in on the comment about opening new communities. I'm guessing that part of the reason the quarter trends were down was not just that you're holding back sales, but that community count continues to go down?

So you mentioned that you're opening a lot of new communities going forward. I'm just curious how - where do you expect the community counts to end up by the end of the year? And are those new communities somehow addressing affordability - are they just basically the same type of communities that you have right now?

Robert Schottenstein

Alex, first thing is that, as we said, the first quarter of last year was the best quarter sales ever we sold over 3,000 houses. So we had a very, very tough comparable to start with. We still are very tightly controlling sales in the majority of our communities have a record backlog units and dollar value at 3/31, and we also have 25% more houses in the field at 3/31 in a year ago. So we've been tightly controlling that.

We want to make sure we deliver to our customers a complete quality home and also you just can't outrun your cost these days and get delivery dates out too far. We do plan on opening a record number of stores. We opened 72 stores all of last year. We opened 31 stores just the first quarter. And when you look at, yes, the store count was down on average about 6% for the first quarter.

Our plans are to be around 200 communities by the end of the year, end of this year with 175. So there will be substantial community count growth this year. Yes, we are opening more communities in the second half of the year than the first half, but there's, still a substantial number of stores opening in the first half so kind of all those factors led to sales being down 19%. But we could have sold a whole lot more houses if we had the construction capacity.

Alex Barron

Okay. And in terms of the sales process, one of my questions is how deep are your wait list, if you can comment on that? And B) at what stage of the construction are you generally releasing these homes for sale?

Robert Schottenstein

Well, in terms of wait list, we're still there. Many of our divisions are limiting sales in 100% of their communities, not just the substantial majority. With the recent rise in rates - there has been a slight underscore the word slight reduction in wait list, but it's still there, and the demand is still very strong, stronger than I would have thought it would have been, frankly, if someone would have told me 90 days ago that rates are going to jump by 200 basis points.

But so far, it's fair to say, and I think this is throughout the industry. I've heard this from a lot of our competitors, the demand for the most part, has remained very robust. That's what we've seen. Our online traffic or in community traffic and the strength of - particularly the strength we're seeing when we open up new communities or release new sections of lots.

So at this point, while the interest rates have gone up and the monthly payments have been affected, I suspect that no one knows for sure, we may start to see a little bit more migration away from the 30-year fixed rate mortgage into perhaps the 10 or 7-year arms. There's been a little bit of that, but that's been very, very slight. But in terms of when we - at what point in the process, the vast majority of our sales are to be built, means that its sale occurs before dig.

And it's when we feel - we have a very good handle on the costs. And frankly, we also build in contingencies in our housing budgets to cover the kinds of unforeseen inflationary movements, some of which are up, some of which have actually been down recently, but we - to protect our margins Phil do you want to additional?

Alex Barron

Yes and I guess???

Robert Schottenstein

Phil does not want to add anything so Alex go ahead.

Alex Barron

Yes I was going to ask, so if - another question, I mean what are the build times like these days? And if you're starting - if you're selling homes at foundation or before the shovel goes in, how do you protect that backlog if these rates keep going higher? In other words, a lot of people probably bought thinking they were going to get a 3% mortgage rate, and now they're going to close that 5.5%. So if these rates keep going higher you guys offering rate loss or something?

Robert Schottenstein

Alex, you're right. I mean if you look at people that bought from us last August, September, they were below 3%. And those people closing now, we have had almost nobody not close I think those people realized there's no supply out there. Most of them understand they're walking into some appreciation day 1. In some cases, some - I don't mean to interrupt, but in some cases, some very significant appreciation as much as perhaps 10%.

So we have not seen partly anybody not close. Who knows what will happen in the future. But again, we're not seeing that. Our issues as far as build times, we talked about going up a couple of weeks in the last quarter. For us to close the house this year by December 31 in most of our communities, those houses need to be in the field by the end of April. And like I said, we have 5,500 homes in the field right now at the end of March.

So we think we're in good shape for what we think we can accomplish this year. As far as cost protection, you try to protect yourself best you can. Bob also mentioned, we have higher contingencies for sticks and bricks than we've ever had before for things that might happen, but we were pleased that our margins were up in the first quarter compared to last year and the fourth quarter, and we feel very good about the backlog margins today.

So we think we're in pretty good shape. But again, we're not getting too far ahead of ourselves, and that's one of the reasons our sales were down 19%.

Alex Barron

All right and I agree with the last gentleman about stepping up on the share buybacks.

Robert Schottenstein

We noted.

Operator

Our next question comes from Jay McCanless from Wedbush. Your line is open.

Robert Schottenstein

Jay.

Jay McCanless

Good to talk to you. Any idea of what percentage of your current lot base was bought pre-COVID? And if you don't have someone come back to just some of the builders have been tossing that stat out there and just wonder if you guys had that same stat?

Robert Schottenstein

I didn't get the whole question. I missed what percentage of what?

Jay McCanless

Your lot count was bought before COVID?

Robert Schottenstein

Oh I mean we think we're in good shape. Again I mean, what we try to focus on again, is having a two to three year owned supply of lots, and we're in good shape there. We also have a couple of years on top of that controlled. So we think that's in very, very good shape. And I realize that, that kind of addresses more the theory that the earlier you buy at the lower the cost is I mean and yes, the cost of it is important, as we're a lot more concerned about the location of it.

We really try to focus on what we call a locations in the better school districts, near the better shopping, near the better transportation. So we're trying to be sure that we have well-located communities. We also spend a whole lot of time on product, especially now with prices increasing so much, affordability continues to be an issue. So we're trying to make sure our product is as efficient as it can be, not overbuilding, trying to stay at the best price points we can. So I know that's kind of a long answer, but we think we are in pretty good shape.

Jay McCanless

Sure, lumber prices have been moving in the builders' favors for several weeks now. I'm just wondering if you're starting to see any of that in the field. And if so, when do you think it could potentially be a benefit to gross margin?

Robert Schottenstein

The second part of that question, I'm not sure I want to answer without giving it some more thought, others on the call here may be able to. But I do know that we've seen in a number of our divisions recently indications of anywhere from a 2% to a 10% drop in lumber and not necessarily the same everywhere, but your point is spot on. And I would guess I'm just guessing that we're probably six months away or so on average. We're seeing it reflected in margins, but I could be wrong.

Phillip Creek

But I would also say, agreeing with that, there's things related to the cost of fuel, that the fuel surcharge and some of those things going up. Every market is a little different. But getting windows, a garage door, we still have challenges in a number of communities, not just availability but cost. We do feel good that we've been able to manage those things from a price increase side of it, but it's still very challenging out there, Jay.

Robert Schottenstein

Anyone that's not worried about inflation, I don't think paying attention. For instance it's a word it's not a whole lot we could do about it other than try to manage and be very prudent and careful about future land deals to some of the questions that - your earlier question about pre-COVID expense management, and I think we're being appropriately cautious right now.

Jay McCanless

Great. In terms of design center spend, what did you see during the quarter? And maybe any color you could give about April, what you're seeing there? I think you said, Bob, in your prepared comments that traffic had held up online and in the stores during April, but I would love to know how much people are spending on some of the other things, whether it's lot premiums or design center, given what rates have done?

Robert Schottenstein

Yes - what I said is that I think traffic or waitlists has dropped slightly, and it's going to be very market specific, but if you had to paint the brush broadly, I'd say slightly. And again, I want to underscore slightly. I don't - have an exact percentage. But even at the current rate today, traffic in the stores, traffic online is very strong. It may not quite as be as strong as long as it was a couple of weeks or a month ago.

But if it stayed like this forever, no one would complain and builders would report strong sales. As far as spend on options and lot premiums, I don't have that information unless...

Phillip Creek

I wouldn't say we've seen it change a whole lot. I mean, the huge majority of the Smart Series customers do not go through our design centers, they actually select out of a couple of pallets primarily in the models. But we try to stay really focused on a lot premiums et cetera. So haven't seen...

Operator

[Operator Instructions] We now turn to Jesse Lederman from Zelman & Associates. Your line is open.

Jesse Lederman

Bob, Phillip and team congrats on the strong results.

Robert Schottenstein

Jesse nice to meet you.

Jesse Lederman

You as well. Just following up on your comments about affordability, can you talk a little bit about pricing power compared to prior quarter given the rise in rates. Are you still pushing price to exceed cost increases? Are you just trying to match the cost increases being mindful of affordability? Are you seeing any pushback in certain price points, particularly?

Robert Schottenstein

I don't think there's this - this may be more intuitive or unreliably anecdotal than scientific because the rates have moved so much so recent. I'm not sure that there's enough to really make a conclusive statement about that. My sense is that our margins are holding up well right now and that there has been little, if any, pushback. But I do not believe we have as much pricing power today as we did two months ago.

It's all relative. Again, margins are at a very high level, just right around 25%, which is a strong margin, producing strong 14% to 15% pre-tax returns. But with each passing week there's, a lot of changes going on right now. And demand has held up considerably better than I think many of us would have predicted. If like I said earlier, if we were told 60 days ago, rates are going to be 5.5%, what will happen to, demand.

I think a lot of people would not have predicted that it would still be as strong as it is, notwithstanding the historically low levels of inventory. And I think the historically low levels of inventory remain a very important metric that is helping to drive demand. There's empty pricing where, it is and the millennials continue to move from renting to owning. Are getting closer to maybe about where they should be as a home ownership rate, still below, I think, some of the previous generations.

And the Gen Zs are beginning to jump into the pool. So that's a good thing, too. I'm really optimistic about housing very concerned about inflation, would expect rates to continue to go up a little bit more. We'll have to see how the adjustable rate mortgage pool plays out in this. As you probably know, the 7 and the 10-year arm are slightly below 5% today. They're in the upper 4s nominal rate by most historical standards, but a lot higher than it once was. So I wish I could give you a more specific answer to your good question, but that's sort of how I see it.

Jesse Lederman

Appreciate that. And then could you just talk a little bit about what your conversation is like with buyers and backlog, maybe some of the more recent buyers makes a ton of sense what you said about buyers from last year that are approaching closed, doing what they can to close on the home, given the embedded equity that they have. But maybe if you can give a little bit more color on you know what buyers doing extended rate locks - what kind of conversations are you having with some of the more recent buyers and backlog?

Derek Klutch

Sure, Jesse this is Derek. The loans that are with the mortgage company, we continually run stress tests on the backlog, and we run it up to 6% and any buyers in backlog where potentially is affecting their qualified ratios. We'll get to them ahead of time and see what other alternatives there are as far as paying off debt or getting co-borrowers. So we are taking a look into the backlog.

And we're also giving them opportunities at that time if they do want to choose to do an extended rate lock. We have a lot of different variations of long-term locks and as the customers may be getting close to qualifying issues present them with all those different opportunities. Right now in our backlog, about 30% of the loans are locked in so some more are taking advantage of extended rate locks in the current environment.

Jesse Lederman

And how does that 30% compared to a typical period? And then just another quick follow-up is?

Robert Schottenstein

About 6?

Jesse Lederman

You know how many?

Robert Schottenstein

How many would have been locked yes zero probably.

Phillip Creek

Yes, six months you're probably - definitely less than 10%, in October sir that the long-term market.

Jesse Lederman

And then in terms of buyers that are having some impact with their qualifying ratios, where does that kind of stand and how that compared to, let's say, six months ago?

Robert Schottenstein

We really haven't seen any have not be able to close because of qualifying issues. Obviously, a little more stress, but we have not seen much fallout with buyers and not being able to qualify dropping out.

Phillip Creek

Yes, the other factor, and I'm not trying to sugar coat, but when the average down payment is somewhere between 80,000 and 90,000 depending upon the market, some of those buyers even have more cash, they could put down. So the combination of embedded equity is your term, which I like for putting more cash down and thereby reducing the amount borrowed, which then impacts a lower monthly payment.

And may be opting for a 10-year arm instead of a 30-year fixed or not. I think the buyers have a few tools - these buyers with the 750 credit scores in a fair amount of cash, I think they have some options.

Operator

We have a follow-up question from Jay McCanless from Wedbush. Jay, your line is now open.

Jay McCanless

Sorry so just a follow-up on that line of questioning, if mortgage rates were to go to 6% tomorrow, what percentage of the backlog do you think could be at risk? And I don't know if you all stress test it up to 7%, if you all have that number that would be great.

Robert Schottenstein

Yes we've done it just north of 6%, and it varies division-by-division and community-by-community. But on average, 10% to 12% could be in jeopardy at 6% interest rates. It doesn't mean they don't qualify just may need - the loan may need to be restructured. But we've run it up to 6% so far. And then if rates continue to rise, we'll continue to bump it up more into the 6s.

Phillip Creek

And if that - it happens, while no - Jay, it's a great question. Well, no one knows if we - what we do know today is if we had another several hundred specs for sale, which those would become obviously, it would be sold very fast the higher price at a higher price.

Jay McCanless

Got it yes that is the good news.

Robert Schottenstein

Now if it happens everywhere all at once, we've been to that movie too, right?

Jay McCanless

Yes, I didn't like that movie very much did we. Okay so Derek, let me ask you one other question. We're hearing more about the Gen Zs starting to come into the market. Is this typically an FHA attached product type buyer? Are they bringing any type of down payment assistance - maybe a couple of minutes on what type of credit score and metrics you're seeing from these Gen Z buyers?

Derek Klutch

Again, that varies pretty significantly between markets. In the comments, we said 23% of our closings were government FHA and VA and only about half of that is FHA. So only 10% to 12%, and that's more a product of our sales prices being outside of the FHA loan limits, them choosing or not being able to use FHA financing.

Operator

We have no further questions. I'll now hand back to Mr. Phil Creek for closing remarks.

Phillip Creek

Thank you very much for joining us look forward to talking to you again next quarter.

Operator

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.