Participants

Jeffrey O'Keefe; Vice President - Investor Relations; Hovnanian Enterprises Inc

Ara Hovnanian; Chairman of the Board, President, Chief Executive Officer; Hovnanian Enterprises Inc

Brad O'Connor; Chief Financial Officer, Senior Vice President, Treasurer; Hovnanian Enterprises Inc

Alan Ratner; Analyst; Zelman & Associates

Alex Barrón; Analyst; Housing Research Center, LLC

Jay McCanless; Analyst; Wedbush Securities

Presentation

Operator

Good morning and thank you for joining us today for Hovanian Enterprises' fiscal 2025 first-quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.
Management will make some opening remarks about the first quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page of the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website.
I would now like to turn the call over to Jeff O'Keefe, Vice President of Investor Relations. Jeff, please go ahead.

Jeffrey O'Keefe

Thank you, Olivia, and thank you all for participating in this morning's call to review the results for our first quarter.
All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
Such forward-looking statements include but are not limited to statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions, and expectations reflected and are suggested by such forward-looking statements are reasonable, we give no assurance that such plans, intentions, or expectations will be achieved.
By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties, and assumptions that are different to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements as a result of a variety of factors.
Such risks, uncertainties, and other factors are described in detail in the sections entitled Risk Factors and Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement in our Annual Report on Form 10-K for the fiscal year ended October 31, 2024, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, change circumstances, or any other reason.
Joining me today are Ara Hovnanian, Chairman, President, and CEO; Brad O'Connor, Chief Financial Officer; David Mikerson, Vice President and Corporate Controller; and Paul Eberly, Vice President, Finance and Treasurer. I'll now turn the call over to Ara.

Ara Hovnanian

Thanks, Jeff. I'm going to review our first-quarter results, and I'll also comment on the current housing environment. Brad will follow me with more details as usual, and of course, we'll open it up for Q&A afterwards.
Let me begin on slide five. Here we show our first quarter guidance compared to our actual results. Starting on the top of the slide, revenues were $674 million, which was near the low end of our guidance. This was due to about 50 fewer wholly owned deliveries than we expected when we gave the guidance, as sales in December and January were a little lower than expected after November had been a very strong month. Additionally, there were some delays due to a variety of factors, including utility hookups. We'll talk about month-to-month volatility shortly.
Our adjusted gross margin was 18.3% for the quarter, which was near the high end of the guidance range that we gave. Our gross margins are typically lower in the first half of the year than the last half. Our SG&A ratio was 12.9%, which was better than the low end of the guidance that we gave.
Our income from unconsolidated joint ventures was $9 million, which was below the guidance we gave. This was due primarily to 40 highly profitable deliveries in two joint venture communities that were expected to deliver in the first quarter, but are now delayed until the second quarter. One community was delayed because of utilities, the other delayed for a change in requirements from the town regarding building codes.
Adjusted EBITDA was $72 million for the quarter, which is above the high end of the range that we gave. And finally, our adjusted pre-tax income was $41 million, which was also above the high end of the range that we gave. We're obviously pleased that our profitability for the quarter was above the high end of the guidance range.
On slide 6, we show how our first quarter results compared to last year's first quarter. Starting in the upper left-hand portion of the slide, you can see that our total revenues increased 13% to $674 million. Moving across the top to gross margin, our gross margin was 18.3% in the first quarter of '25, which was near the high end of our guidance, but below last year as expected.
The year-over-year decrease in gross margin was primarily due to increased use of incentives. The continued use of mortgage rate buy-downs is the primary incentive being utilized by our buyers. It's also related to a greater focus on pace versus price, which we discussed in our last conference call.
Given the persistently high level of mortgage rates today, even though they've drifted down just a bit over the last few weeks, we expect to continue to use mortgage rate buy-downs to help with homebuyer affordability.
During this year's first quarter, incentives were 9.7% of the average sales price. This is up 160 basis points from a year ago, and 670 basis points higher than fiscal '22, which was prior to the mortgage rate spike impacting deliveries. Because of the continued use of incentives and our increased land-like position, we expect gross margins to be at similar levels in the second quarter as we provided in our guidance.
Moving to the bottom left, you can see that our total SG&As, a percentage of total revenue, improved 160 basis points to 12.9% in this year's first quarter. This is partially due to the benefits of top-line growth. And in the bottom right-hand portion of the slide, we're excited about pre-tax income improvement over the prior year, up 30% to $41 million.
As we explained last quarter, we believe the tradeoff of pace versus price, even with lower gross margins, can still result in higher profits. We continue to emphasize pace over price, and we expect to report strong EBITDA ROI again going forward.
As a side note, we utilize current incentives, current home prices, and current sales pace in new land acquisitions, and they must meet our IRR minimum hurdle rate of 20% after the cost of those incentives. You'll see momentarily that even with underwriting to these more difficult standards, we're still able to find plenty of land opportunities with solid ROIs to meet our future growth needs.
If you turn to slide 7, you can see that contracts for the first quarter, including unconsolidated joint ventures, increased 9% year over year. However, as you can see on slide 8, there was not steady growth throughout the quarter. Here you can see that we started the quarter off with a bang. In the month of November, contracts increased 55% year over year.
Contracts growth slowed to 3% positive year over year in December, and then in January, contracts were down 10% year over year. But that was a very tough comparison to last year's January when contracts were up 33% from the previous year.
Turn to slide 9. While total contracts for the quarter were up compared to last year, as you can see, much of the year, in fact, much of the last couple of years, have been extremely volatile on a monthly basis, depending on world news, inflation, interest rates, consumer sentiment, and a variety of other factors. May and June contracts were down to varying degrees. July through December contracts were up between 3% and 82%, and then January was down 10%. As we have seen, one month does not a trend make, either good or bad. At the moment, sales activity is slower than last year. We've learned not to get too rattled or too excited over a month and feel confident about the long-term fundamentals for the new housing market.
If you turn to slide 10, you can see contracts per community were the same in both this year's first quarter and last year at 9.6. Even though it was flat year over year, this is a very solid sales pace, as it's significantly higher than our quarterly average for the first quarter since '97, and that average was 8 contracts per community. Furthermore, if you exclude bill for rent contracts from both periods, this year's first quarter had a nice improvement from 9.2 to 9.6 contracts per community.
On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago. Once again, the only month with year over year increase is November, but each month of the quarter exceeds the monthly average since 2008. November at 3.1 compares favorably to the monthly average of 2.3.
The same holds true for December at 2.9 compared to 2.4, and January at 3.5 also compares favorably to a monthly average of 3.0. This illustrates that one reason for contracts per community being down year over year is that these two most recent months is due to a tough comparison from a year ago. This year's contracts per community are strong compared to historical levels. Nonetheless, they were lower than our expectations.
Turning to slide 12, we show contracts per community as if we had a December 31 quarter end. This way we can compare our results to our peers that report contracts per community on a calendar quarter end. At 9.7 contracts per community, our December quarterly sales pace is the third highest among public home builders that reported at this time.
On slide 13, you can see that our year-over-year growth in contracts per community for the same period was the highest among our peers. Again, this was as if our quarter ended in December so that we could compare to many other companies. What we're trying to illustrate in these last two slides is that we're still selling at an above average number of homes compared to our peers.
On slide 14, you can see that for a sizable percentage of our deliveries, our home buyers continue to utilize mortgage rate buydowns. The percentage of home buyers using buydowns in this year's first quarter was 74%. The buydown usage in our deliveries indicates that buyers continue to rely on these mortgage rate buydowns to combat affordability at the current mortgage rates.
Given the persistently high mortgage rate environment, we assume buydowns will remain at similar levels going forward. In order to meet home buyers' desires to use cost-effective mortgage rate buydowns, we're intentionally operating at an elevated level of quick movement homes, or QMIs as we call them, so that we can offer affordable mortgage rate buydowns in the near term.
On slide 15, we show that we had 9.3 QMIs per community at the end of the first quarter, which is about one QMI per community higher than where it's been for the last few quarters now. We define QMIs as any unsold home where we have begun framing. In the first quarter of 25, QMI sales were 69% of our total sales. 69% of our QMI sales, that was the second highest quarter since we started reporting this number 10 quarters ago.
Historically, that percentage was 40%. Obviously, the demand for QMIs remains high, so we're comfortable with the current level of QMIs. Due to slightly slower than expected sales pace, we had 319 finished QMIs at the end of the first quarter.
On a per community basis, that puts us at 2.6 finished QMIs per community, and that's up from 1.8 finished QMIs per community at the end of last year. But we've made adjustments to starts to make sure that we don't get too far ahead of ourselves. We targeted a slightly higher number of QMIs as we entered the spring selling season.
Our goal with QMIs is obviously to sell them before completion. The focus on quick move-in homes results in more contracts that are signed and delivered in the same quarter, which leads to lower levels of backlog at quarter ends, but a higher backlog conversion.
During the first quarter of '25, 34% of our homes delivered in the quarter were contracted in the same quarter. This resulted in a backlog conversion ratio of 76%. This is the highest backlog conversion ratio we've had in the first quarter for the last 27 years. We'll continue to manage our QMIs at a community level and are highly focused to match our QMI starts pace with our QMI sales pace. We'll monitor the spring selling season and we'll adjust accordingly.
If you move to slide 16, you can see that even with higher mortgage rates, we are still able to raise net prices in 40% of our communities during the first quarter. While we're focusing on pace versus price, we're still able to raise prices in a considerable percentage of our communities.
Before I turn it over to Brad, I want to emphasize that land-like deliveries typically have lower gross margins than deliveries from wholly owned communities. Further, our QMI deliveries also typically have a lower gross margin than our to-be-built deliveries.
I want to illustrate how we can achieve a solid ROI with lower gross margins, given our continued focus on growth and inventory turnover. Beginning in the fourth quarter, we emphasized pace versus price and we continued that strategy into the first quarter of '25 and again now in the second quarter.
On slide 17, we illustrate the impact a faster sales pace at a lower margin can have on our returns. Obviously, a reasonably solid sales pace is key. The first column is a hypothetical scenario where we use our historical normal gross margin and more wholly owned communities as opposed to land-like communities. Some of the other assumptions we make here are that our total revenues, SG&A expenses, financial services income, and unconsolidated joint venture income are similar to what we achieved in fiscal '24.
We also assume no contributions from land sales, which in reality have occurred often over the past few years. This scenario produces a 23% EBIT ROI. The column on the right shows an alternate hypothetical scenario with an 18.5% gross margin, which we believe could be our new normalized gross margin in the near term due to our increased use of lot options as part of our land-like strategy and more incentives to get the sales pace we desire.
Given our increased lot count, we're well positioned to drive delivery growth in excess of 10% on an annual basis over the next few years. So for this example, we used a 14% increase in total revenues. We assume that we get some efficiencies with the growth in revenues and our SG&A expenses only increased by half of the total revenue growth, or a 7% increase, which could be conservative.
We also assume that other revenues and profits from financial services and JVs grow in lockstep with our sales growth. This results in a slightly lower EBIT margin, but a modest increase in our pre-tax income dollars.
And assuming the same amount of capital, our land-like strategy, which has increased our option lot position to an all-time high of 84%, should result in increased inventory turns. Under this scenario, we hold our average inventory levels flat, which drives inventory turns calculated using revenues to 2.5 from 2.2. This increase in inventory turns more than makes up for the lower gross margin and results in a slightly higher ROI at 25%.
If you compare that to the current ROIs for our peers, we would remain well above the median. The current monthly volatility makes it very difficult to project out a full year, but the hypothetical model shows you what our strategy is and what is possible, even with a lower margin. Our growth in communities should sustain the growth we are targeting in the coming years, in spite of a slower sales environment, positioning us to deliver near-industry-leading ROIs again.
I'll now turn it over to Brad O'Connor, our Chief Financial Officer.

Brad O'Connor

Thank you, Ara. Turning to slide 18, you can see that we ended the quarter with a total of 148 open-for-sale communities, a 10% increase from last year's first quarter. 125 of those communities were wholly owned. During the first quarter, we opened 15 new wholly owned communities, sold out of 16 wholly owned communities, and contributed four wholly owned communities to a new joint venture. Additionally, we had 23 domestic unconsolidated joint venture communities at the end of the first quarter.
We opened three new unconsolidated joint venture communities, closed one during the quarter, and added four previously wholly owned communities. We continue to experience delays in opening new communities, primarily related to utility hookups and permitting delays throughout the country. Needless to say, the hurricanes and fires did not help the situation this year. We expect community count to continue to grow further in fiscal '25.
The leading indicator for further community count growth is shown on slide 19. We ended the quarter with 43,254 controlled lots, which equates to a 7.8-year supply of controlled lots. Our lot count increased 3% sequentially and 29% year-over-year. If you include lots from our unconsolidated joint ventures, we now control 46,603 lots. We added 5,800 lots in 41 future communities during the first quarter. Our land teams are actively engaging with land sellers, negotiating for new land parcels that meet our underwriting standards, even with high incentives and the current sales pace.
In fiscal '24, we began talking about our pivot to growth. This followed a stretch of several years where we used a significant amount of the cash generated to pay down debt. It's significant to note that while our total lots controlled grew over the two years, our lot options grew by 16,000 and our lots owned shrunk by 1,600 as we focus on our land life strategies.
On slide 20, we show our land and land development spend for each quarter going back five years. You can see how that pivot to growth has impacted our land and land development spend. During the first quarter of '25, our land and land development spend increased 7% year over year to $248 million. You can clearly see that the land and land development spend has increased over the five years shown on this slide.
Our first-quarter land and land development spend represented the highest first quarter spend since 2010 when we started reporting that metric. Our corporate land committee continues to be busy, which is an indication that our lot counts should continue to increase over time, but not always in a straight line.
Again, we are using current home prices, including the current level of mortgage rate buy-downs and other incentives, current construction costs, and current sales space to underwrite to a 20%-plus internal rate of return. And then right before we are about to acquire the lots, we are re-underwriting them based on the then current conditions just to be sure that it still makes sense to go forward with the land purchase.
We feel good that our new acquisitions will yield solid ROIs since we are building in huge incentives and greater paces. Our underwriting standards automatically self-adjust to any changes in market conditions. We are finding many opportunities in our markets and are very focused on growing our top and bottom lines for the long term. And this growth in lots control precedes growth in community count, which precedes growth in deliveries. We are very pleased with the trends.
On slide 21, we show the percentage of our lots controlled via option increased from 44% in the first quarter of fiscal ['15] to 84% in the first quarter of fiscal '25. This is the second quarter in a row at 84% options, and it is the highest percentage of option lots we've ever had, continuing our strategic focus on land life.
Turning now to slide 22, you see that we continue to have one of the highest percentages of land control via options compared to our peers. Needless to say, with the second highest percentage of option lots, we are significantly above the median.
On slide 23, compared to our peers, we have the second highest inventory turnover rate. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and further improve our terms on inventory in future periods. Our focus on pace versus price is evident here. Turning to slide 24, even after spending $248 million on land and land development, as well as $18 million on repurchasing common stock, we ended the first quarter with $222 million of liquidity, which is finally within our targeted liquidity range. This is the first quarter in years that we have been fully invested.
Turning now to slide 25, this slide shows our maturity ladder as of January 31, 2025. During the second quarter, we intend to pay off early the remaining $27 million of the 13.5% notes, our highest cost debt, that mature in February of 2026. This is an example of the steps we have taken over the past several years to improve our maturity ladder and reduce our interest costs. We remain committed to further strengthening our balance sheet going forward.
Turning to slide 26, we show the progress we have made to date to grow our equity and reduce our debt. Starting on the upper left-hand part of the slide, we show the $1.3 billion growth in equity over the past few years. During the same period on the upper right-hand portion, you can see the $703 million reduction in debt.
On the bottom of the slide, you can see that our net debt to net cap at the end of the first quarter of fiscal '25 was 52.2%, which is a significant improvement from our 146.2% at the beginning of fiscal '20. While our net debt to cap increased sequentially due to less cash, our gross debt to cap continued to decline during the first quarter.
We still have more work to do to achieve our goal of 30%, but we are comfortable that we are on a path to achieve our target soon. Given our remaining $206 million of deferred tax assets, we will not have to pay federal income taxes on approximately $700 million of future pre-tax earnings. This benefit will continue to significantly enhance our cash flows in years to come and will accelerate our growth plans.
Regarding guidance, our internal plan, given our significant new community openings and current sales, has had substantial growth in deliveries and revenues in fiscal '25. However, given the volatility and the difficulty in projecting margins with moving interest rates and volatility in general, we will focus our guidance on the next quarter.
Our financial guidance assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, tariffs, inflation, or cancellation rates. Keep in mind, some materials have already increased in cost in anticipation of tariffs. Our guidance assumes continued extended construction cycle times averaging five months compared to our pre-COVID cycle time for construction of approximately four months. It also assumes that we continue to be more reliant on QMI sales, which makes forecasting gross margins more difficult.
Our guidance assumes continued use of mortgage rate buydowns and other incentives similar to recent months. Further, it excludes any impact to SG&A expense from our phantom stock expense related solely to the stock price movement from the $132.29 stock price at the end of the first quarter of fiscal '25.
Slide 27 shows our guidance for the second quarter of fiscal '25 compared to actual results for the first quarter of '25. Our expectation for total revenues for the second quarter is to be between $675 million and $775 million. The midpoint of our total revenue guidance would be up 8% compared to the first quarter. Adjusted gross margin is expected to be in the range of 17.5% to 18.5%.
At the midpoint, it would be down slightly compared to the first quarter. This is lower than a typical gross margin, particularly because of the cost of mortgage rate buydowns and our focus on pays versus price. As we mentioned earlier, our gross margins are typically lower in the first half of the year and improve in the latter part of the year.
Part of that is driven by the higher volume in the latter half compared to the first half, which helps regarding the indirect overhead part of gross margin. We expect the range of SG&A as a percentage of total revenues to be between 11% and 12%, which is still higher than usual. One of the reasons our SG&A is running a little high is that we are gearing up for a significant community account growth and we have to make new hires in advance of those communities.
The upcoming growth is evident from our land position and land spend. SG&A ratio would improve 140 basis points at the midpoint of this guidance. Our expectations for adjusted pre-tax income for the second quarter is between $20 million and $30 million.
During the first quarter of 2025, we contributed four wholly owned communities to a new unconsolidated joint venture and booked $23 million of income on the sale of those assets. This shows up on the other income line on our income statement. We were carrying the land on our books at a substantial discount to its current fair value.
Even after recognizing this depth of value in our quarterly earnings, we now have four unconsolidated joint venture communities that should provide significant profits for the next few years at or above our hurdle rates. Because of the $22.7 million of income, the high end of the adjusted pre-tax income guidance for the second quarter would be at lower levels than our first quarter.
Moving to slide 28, we show all of the guidance we gave for the second quarter. The only two lines on here that we have not mentioned are income from unconsolidated joint ventures and adjusted EBITDA. We expect income from joint ventures to be between $5 million and $10 million and our guidance for adjusted EBITDA is between $50 million and $60 million.
Turning to slide 29, we show that our return on equity was 33%. The second highest over the trailing 12 months compared to our peers. Obviously, this is helped by our higher leverage. On slide 30, we show that compared to our peers, we have one of the highest adjusted EBIT returns on investment at 29.8%. While our ROE was helped by our leverage, our adjusted EBIT return on investment is a true measure of pure home building operating performance without risk.
With the highest among our mid-sized peers and among the highest of all peers regardless of size, we believe we are striking a good balance between pace and price, which is delivering industry-leading ROIs and ROEs. As our leverage continues to come down, we believe we will not only have industry-leading EBIT ROIs, but also have one of the leading pre-tax ROIs as well.
Over the last several years, we have consistently had one of the highest EBIT ROIs among our peers. Eventually, investors will recognize our consistent superior returns on capital and significantly improved balance sheet.
Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT return on investment, enterprise value to EBITDA, and our price-to-earnings multiple when establishing a fair value for our stock. We believe when all of the fundamental financial metrics are considered, our stock is one of the most compelling values in the industry.
On slide 31, we show our price-to-book multiple compared to our peers, and we are right at the median. On slide 32, we show the trailing 12-month price-to-earnings ratio for us and our peer group based on our price-to-earnings multiple of 3.75 times at Friday's stock price of $121.57. We are trading at a 55% discount to the home building industry average PE ratio, if you consider all public builders, and a 45% discount when considering our midsize peers. We recognize that our stock may trade at a discount to the group because of our higher leverage, but our leverage has been shrinking and our equity has been growing rapidly.
On slide 33, we show that despite our extremely high ROE, there are a number of peers that have a higher price-to-book ratio than us. This slide more visually demonstrates how much we are undervalued relative to the other builders when looking at the relationship between ROE and price-to-book. A very similar result exists when looking at ROE to price-to-earnings.
On slide 34, you can see an even more glaring disconnect with our high EBIT ROI and our PE. We have the third highest EBIT ROI, and yet our stock trades at the lowest multiple-to-earnings of the group. These last four slides further emphasize our point that given our high return on equity and return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public home builders.
That concludes our formal comment, and we are happy to turn it over for Q&A now.

Question and Answer Session

Operator

(Operator Instructions) Alan Ratner, Selman & Associates.

Alan Ratner

First question, just in terms of kind of what you're seeing on demand, you mentioned a softer start to the spring so far. If I look at rates, they're down about 25 basis points or so from the recent highs at the beginning of the year, which is not a huge move, but at least it's moving in the right direction.
So Ara, what do you attribute the recent shoppiness to? Because it's clearly not a worsening rate environment. Are you starting to see more concern over the employment outlook, or is it a tougher time getting buyers to qualify? Any color you can give us just to kind of understand the more recent activity would be great.

Ara Hovnanian

Sure. Honestly, it's the flavor of the month concern is what we've been seeing and feeling. There's nothing to specifically measure it, but one month it might be concerned about tariffs and the effect that's going to have on inflation for consumers. One month it may be about interest rates.
Another month it may be about World War possibilities. It honestly varies all over the place, and we've tried to demonstrate with full transparency how much variation we have seen from one month to another month to another month. One month there's some good news and sales are great. Another month there's some bad news, sales are bad, and then it keeps going up and down and up and down, and it's been the pattern for a while now.
So I can't say at the moment there's any specific news that stands out other than there's just so many moving parts in general. There's constantly something for consumers to be worried about.

Alan Ratner

Yeah, it's definitely a kind of feels like a whack-a-mole environment a little bit, but hopefully things can settle down a little bit here. On that point, I'd love your thoughts on the DC market. You guys have a pretty nice-sized business there, and there's a lot of headlines coming out there related to the federal government layoffs and what impact that could have on the DC market in general. So any thoughts you'd be willing to share just in terms of the near-term and intermediate-term outlook for DC and the surrounding area?

Ara Hovnanian

Sure. The broader DC market includes Delaware, Maryland, Northern Virginia, and West Virginia. I'd say in general, the Delaware market has been very strong, and it's really not related to employment. There's more retiree and our active adult business and second-home business has been very healthy there. It's a low-tax environment, low-cost environment that's been very strong. The Virginia market is a little more tech and defense-oriented, and that market generally remains strong.
More of the government, and by the way, West Virginia is much the same. It's just west of the defense capital, so to speak, around the Dulles Airport area. The Maryland market, and most specifically Baltimore and North, is the one that theoretically could get most affected by some of the government reductions in workforce.
So we'll be looking at that closely. Of those markets, maybe West Virginia is the smallest, and Maryland is the second-smallest. Delaware and Northern Virginia are larger for us. So I think that's good news, even with the potential government layoffs.

Alan Ratner

Yeah, absolutely. I appreciate that. And then, it's obviously very early on, but have you seen any kind of data points that give you pause, either resale inventories starting to rise or slips in your traffic data, that would suggest that the headlines are starting to bleed into the demand trend?

Ara Hovnanian

Yes. So resale data is tweaking up just a bit, but you have to put it in perspective. It's still way below our historical norms, the country's historical norms, well below. So a little increase off the bottom is not something that concerns us overall. It does vary quite a bit by market still. Our worst markets might be a five-month supply, which would be pretty close to normal, frankly. Our best markets are still at like a1.5 month supply. So it's definitely very different in different markets. There was a second part of that question. I've forgotten it.

Alan Ratner

Just traffic. I think I threw out a few different potential data points.

Ara Hovnanian

I'd say website traffic has been very solid, but actual foot traffic was a little lower than our expectations. So people are looking more than they have, but actually jumping over the finish line a little in terms of actually visiting a little less than what we expected.

Brad O'Connor

The only thing I'd add to that is that the very most recent week that just ended, we did see a pop in traffic, foot traffic. So maybe that's the beginning of a good time, but it's only one week.

Operator

Alex Barroó, Housing Research Center.

Alex Barrón

I was hoping you could comment on the level of incentives you guys are offering today versus, say, two quarters ago or a year ago.

Brad O'Connor

Well, I think, Alex, in our script prepared remarks, we commented 9.7% and a year ago it was 6.7%, something like that. So 300 basis points increase year over year. And then if you went back another year, 1.7%, 1.5%, something like that. So significant increase over two years ago, 300 basis points over last year, which is still a reasonable size growth, obviously, in incentives. And as you heard us comment, mostly through some form of mortgage rate buy-down along with potential other incentives, closing costs, things like that.

Alex Barrón

So what does that generally translate into what kind of interest rate you guys are having to offer to, I guess, stay competitive? Because I'm sure it's not for any other reason.

Ara Hovnanian

Yeah. It varies market by market, community by community. It is primarily geared toward QMIs. So where we have older QMIs, we'll advertise and offer 4.9% mortgages. That's more typical. Where we don't have as many QMIs, we might offer a 5.75% mortgage rate. But we're reviewing that right now. And depending on our final analysis, we may increase or decrease slightly those targets.

Alex Barrón

Got it. And in terms of that, what does your finished QMI count look like right now versus, say, a year ago? And how does that impact your specs start strategy?

Brad O'Connor

So we ended the quarter with 319 finished QMIs, which was up from the fourth quarter. I think it works out to 2.6 or something like that per community. So a little higher than we would like, up from 1.8 at the end of the fourth quarter. On the other hand, we were starting or did start more homes in preparation for the spring selling season.
So I think our goal would have to come down some by the end of the second quarter. And the other thing to note, and I think we made this comment, is that we have certainly slowed down starts in communities where we have extra QMIs, so we don't get ahead of ourselves. So it's something we look at community by community every week to make sure we don't get too many QMIs teed up at one time in a particular community.

Ara Hovnanian

And just to clarify Brad's earlier comment about the use of incentives directionally with 100% on, but the exact numbers, the first quarter we're at 9.7%, and that's up 160 basis points from a year ago. But it is up 670 basis points from '22 when those deliveries preceded the big spike in interest rates.

Alex Barrón

So theoretically, if rates were to start coming down towards 6%, one would assume you wouldn't need to spend 9% niche points on buying down the rate that much, which would in turn translate to margins going back up significantly, right?

Brad O'Connor

That is theoretically possible and what we're hoping for. I mean, the other way that could play out, Alex, though, is you could buy the rates down even further for the same cost and hopefully make it that much more affordable for customers. So it's a play as to what drives sales at the end of the day. We need to drive pace, so.

Operator

(Operator Instructions) Jay McCanless, Wedbush.

Jay McCanless

First question I had, the comment you guys made on slide 17 where you talked about this 18.5% hypothetical gross margin potentially being the adjusted gross margin level going forward. I mean, how long do you all expect adjusted gross margins to sit at that level? Do you think it's the rest of the year given current conditions or possibly longer than that?

Ara Hovnanian

I wish we could answer it, Jay, but the crystal ball gets very foggy and as we tried to demonstrate with full transparency, the volatility in sales month to month has been extraordinary over the last couple of years. Again, one month great, one month bad. If you asked me in November, I would have said, wow, we're going to have much greater sales and we're not going to have to offer much in the way of incentives. If you asked me in January, I'd say the opposite.
So it just depends on the month. Net though, we're still very bullish on the long-term fundamentals and we recognize we're just going to have months and months volatility depending on the news that's out there at the moment.

Jay McCanless

Great. Thanks, Carl. Second question I had, that's 40% of where you're raising prices. Is there any geographic color behind that, more in the West or anything you can talk about where you are able to push price?

Brad O'Connor

Yeah, it certainly is. Obviously, it's community by community, but it's certainly in what I would say are stronger markets, which continues to be more on the East and the Northeast, Mid-Atlantic, Delaware, Southeast Coastal, the Carolinas. Those are probably the strong, they are the stronger markets and where we're seeing more of those price increases than in the West where I would say it's been still a challenge just to get the sales base.

Jay McCanless

Understood. Then the last one I had, did you all have any direct impact from the fire other than maybe utility hookups out West or anything we need to be thinking about either from a volume or gross margin perspective as they recover from those fires out West?

Ara Hovnanian

Well, obviously, and it's a good question, there are a lot of trades that have been drawn to helping the region in California recover from the fires. That's not helpful to new home construction because there's a limited pool of trades. If they're drawn to one area temporarily to either clean debris, repair minor problems, et cetera, and certainly the utility companies, it does hurt from the standpoint of the overall pool of labor.
The same is true, although it preceded it by a month or so with the hurricanes down in Southeast Florida also had the same effect. We saw it on both coasts in a very short period, but we've seen these temporary aberrations before and eventually they stabilize.

Operator

Thank you. I'm showing there are no further questions in the queue at this time. I will now turn the call back over to Mr. Ara Hovnanian for any closing remarks.

Ara Hovnanian

Thank you very much. I know we're all anxious to see what the next months hold as the spring selling season unfolds more, but again, we're very optimistic about our trends, our growth, and our long-term fundamentals of the housing market. We'll look forward to giving you an update next quarter. Thank you.

Operator

This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.