I want to walk you through something really interesting that HousingWire reported about M/I Homes, because it tells us a lot about where the building industry is headed right now. While most of the big builders are pulling back on spec inventory to protect their profit margins, M/I Homes is doing the opposite. They're leaning hard into specs, with about 78 percent of their Q2 sales coming from homes they built before they had a buyer lined up. That's a bold strategy when most builders are being cautious.
Here's what makes this work for them. In Q2, M/I Homes sold 2,387 homes, which was 15 percent more than the same quarter last year and a record for any second quarter in their history. They're beating the national market, where new home sales actually dropped about 5.6 percent year over year. The company achieved this volume by keeping their construction cycle tight, carefully picking which lots and floor plans to build on, and really understanding their individual markets so they're not just throwing inventory everywhere.
Now, there's a real cost to this approach. According to HousingWire's reporting, M/I Homes' gross margin came in at 22 percent, down from 24.7 percent a year ago. That margin hit is coming from the incentives they're using to move these spec homes. The company is heavily relying on mortgage rate buydowns, which are getting expensive as rates have climbed back toward 7 percent. The CEO, Robert Schottenstein, was candid during their earnings call, saying that margins on build-to-order homes are better across all 17 of their markets, sometimes by just a little and sometimes by as much as 200 basis points or more depending on where you are.
What's smart about their approach is they're not taking a one-size-fits-all angle with those buydowns and incentives. They own their own mortgage company, and they're tailoring their incentive packages community by community and buyer by buyer. In more affordable neighborhoods, they might offer closing cost help, while in other areas buyers might prefer different mortgage types or upgrades instead. Schottenstein emphasized that not all builders need to discount as aggressively as some are doing, and he suggested that some competitors are being unnecessarily aggressive with price cuts that can disrupt their local markets.
One other shift the data shows is that M/I is moving up market a bit. About 34 percent of their sales last quarter came from their Smart Series, their entry-level line, compared to 52 percent a year ago. That means move-up buyers are becoming a bigger part of their mix, and the company has been strategically looking for well-located infill opportunities in select markets where they think they can serve that demographic well.
What I am seeing locally here in the Bay Area and across the East Bay is that this M/I Homes approach actually mirrors what smart operators are doing in our market too. When buyer traffic is tight and rates stay elevated, the builders who are winning are the ones who understand their specific neighborhoods deeply, who aren't just blanketing the market with generic incentives, and who are willing to accept lower margins in exchange for volume and market position. For buyers right now, this means there's real competition driving incentives, especially in the more affordable segments, but it also means the builders with staying power are the ones making deliberate choices about where and what they build.
