There is a version of this market where “buy sell” becomes almost everyone’s default operating system.
When that happens, the question becomes whether incentives are rising. They do it. The real question becomes: who has the self-control and balance to decide where to lean—and where to hold the line—even if it means slowing near-term volume.
An even bigger question for every home building business is Who are you? What are your key skills to be faithful to God as an organization? And, based on that, what do you want to do and be in the coming months?
That’s the story at work in Meritage Homes’ Q4 2025 and full-year 2025 performance: a company with a forward-looking operating model, heavy strategy, and social discipline that gives it enough control to choose the pace/price of a stop—even in a quarter management has repeatedly described as unusually strong.
Wolfe Research put this bluntly, attributing Meritage’s “outperformance” to a “well-managed and pragmatic conference call near the pivot, holding the line on discounts rather than chasing volume in a challenging stimulus environment, leading to a better-than-feared 1Q26 Gross Margin guidance.”
Soft demand, intentional handling, and conversion mechanism
In prepared remarks, Executive Chairman Steven Hilton described Q4 as “marked by softer-than-expected market conditions as affordability challenges persist and consumer confidence declines.”
He added that the pace of absorption in Q4 decreased to “3.2 net sales per month,” which he explained was “a Q4 sales season, a reversal of consumer urgency and a strategic decision to hold the promotion line.”
That phrase “hold the line” is important because, at Meritage, that’s no mean feat. Managers presented it as an operational choice made in a specific competitive environment.
CEO Phillippe Lord said, “As we entered Q4, we saw many builders clearing decks with older equipment… [we] I chose deliberately… not to rush to sell more and work at a slower volume. “
With that commitment, the Lord answers the question, “Who are we? How were we made? What are we good for?”
Data in the earnings release put the quarterly decline in clear terms: Q4 orders of 3,224 were down 2% year-over-year; 3,755 closings down 7%; foreclosures fell 12% to $1.4 billion; and diluted EPS fell 49% to $1.20 (or adjusted for $1.67). Gross margin on home closings came in at 16.5% GAAP and 19.3% adjusted.
But here’s the takeaway: even in that strong quarter, Meritage’s spec-plus-speed machine has been turning inventory into closes at an overwhelming conversion rate. Hilton called it an “unique 221% backlog conversion rate”. (Steven Hilton, Executive Chairman) Lord reiterated that “with 63% of Q4 closings sold during the quarter, our backlog conversion rate was one of the highest in the company at 221%.” (Philippe Lord, CEO)
That is not a financial statement artifact. That’s the strategic working condition: keep inventory “close to finished,” keep cycle times short, and be able to close quickly enough so that intra-quarter sales are a consistent supply of deliveries.
Low orders, low revenue, margins, and population growth
The results for the full year 2025 read as someone working hard to fight the slow demand tape with scale and performance rather than price alone:
- Full-year orders: 14,650, basically a year-over-year low
- Closes: 15,026, down 4%
- Home foreclosures: $5.8 billion, down 9%
- Home closing gross margin: 19.7% (GAAP), down 520 bps; 20.8% adjusted
- Net profit: $453.0 million, down 42%
- Diluted EPS: $6.35 (GAAP), down 41%; $7.05 change
Management’s explanation for keeping orders low was straightforward: population growth slows absorption. Hilton said full-year sales were “significantly lower compared to the prior year as we grew the number of communities ending by 15% year-over-year to 336 communities, offsetting slower demand.”
Lord put the numbers about the construction of the operation: “During the quarter, we brought 35 new communities online… In the full year of 2025, we opened more than 160 communities. In addition, we expect another growth of 5% to 10% in the number of communities in 2026.”
The underlying trade-off is reflected in the release: the pace of absorption for the year decreased by 9% while the average population increased by 12%. That’s the definition of scaling the platform to protect capacity while acknowledging that each community’s needs have softened.
A creative discipline that separates “strategy specific” from “risk specific”
If housing demand drives builders to offer incentives and end specifications, the difference maker becomes inventory management: how quickly you can reduce starts, lower specs, and keep the system from flooding.
Wolfe called out Meritage specifically for creating a pattern they’re seeing elsewhere: “MTH is taking real steps to align inventory with demand with Stars down to 2,700 in 4Q (-24% YoY) compared to 3,224 orders and 3,755 closures, working in contrast to many builders still in line with Sales Start-ups.”
During the call, Lord confirmed the demotion:
“In Q4, to keep up with our current sales pace, we estimated starts, which included approximately 2,700 homes. That’s 24 percent less than last year’s Q4 and 12 percent less than Q3.”
Then came the inventory metric that’s important if you’re serious: details per store. Lord said: “We finished the quarter with almost 5,800 homes, down 17% from around 7,000 last year…
Wolfe captured the same story: “per-community data fell to 17.4 compared to 24.1 last year (-28% YoY) while per-community data is at its lowest level since mid-2023.”
But Meritage didn’t present 17 details in each store as a trophy. The Lord acknowledged the problem of the mixture:
“We still have about 50% of the details completed or completed. We would like it to be about one-third… one-third can go in, in 30 days… one-third can go in 60 days, and the other third, we are still starting.”
Lord’s statement amounts to a key point in what efficiency looks like in a particular plan: not just “more details” or “fewer details,” but the right balanced stage combination to preserve speed without overexposing the finished product.
Margin compression, defined the way the operators define it
Meritage did not hide the margin mechanics. CFO Hilla Sferruzza laid out Q4 margin pressures:
“Gross margin for home closings improved by 400 bps in Q4 compared to last year due to higher utilization of rebates and discounts, higher lot costs and limited losses, all partially offset by improved direct costs and shorter cycle times.”
He also gave two practical signals that will be very important as 2026 unfolds:
- Direct costs are trending in the right direction: “During the quarter, we had direct cost savings of approximately 4% per square foot year-over-year… the benefits will not be seen until later in 2026 as we continue to work with our existing inventory that was built earlier in the year.”
- Capital cost pressures do not end tomorrow: “Our land base in 2025 included higher land development costs from work completed in the past few years, which will continue to impact our levels in 2026.”
In other words, the user’s work produces savings, but the financial statement will be short because the inventory is built up too early and because the global basis has a long tail.
Earth and surface resets are protective and opportunistic
Meritage’s Q4 included a significant “self-service” reset: global contract terminations, impairment charges, and severance charges.
In an earnings call, CEO Phillippe Lord said the company “conducted an in-depth review of our global portfolio and chose to cut certain positions to capitalize on our global portfolio as opportunities arise in the market.”
In this call, he expanded on the idea: “The recent decline in demand has presented opportunities to improve our global portfolio in certain small markets…
CFO Sferruzza measured the completion in terms of performance:
“In addition to cutting more than 3,400 lots … we also recorded a $7.8 million write-down this quarter on owned inventory as we adjusted prices to match local market conditions.”
And Meritage has tied that reset directly to more remodeling and technology-driven efficiencies. The Lord said:
“Based on our current vision for our title this quarter, we are building on a multi-year technology plan focused on automation and process efficiency, we are now able to achieve improved office productivity consistent with our one-size-fits-all strategy.”
Buying back is a strategy, not an afterthought
Meritage management made share buybacks the main plank of the story, repeatedly touting it as the best use of capital at the current valuation.
From the release of the proceeds: “In the near term, we are accelerating share repurchases… as we believe this represents the most compelling use of capital given the significant undervaluation of our stock.”
On the call, Lord put it even more clearly: “When our stock is trading at a significant discount to intrinsic value, the best investment I can make for our shareholders is to buy our existing business at a discount.”
Meritage’s full-year profit was $416 million, “representing 92% of total revenue this year.”
Wolfe tied the buyback stance to value: “the company is returning substantial cash to shareholders while trading below Book Value. Management clearly views the company’s shares as undervalued…” (Trevor Allinson, Wolfe Research)
Young investors are listening
Meritage guided Q1 2026 gross domestic margin of 18% to 19% and diluted EPS of $0.87 to $1.13. But the most important takeaway—because it goes directly to Wolfe’s “hold the line”—is how management is showing off the season and near-term stability.
In a Q&A, Sferruzza told Zelman’s Alan Ratner:
“For the most part, what we’re seeing right now is stuck with green shoots that are hopeful for the spring selling season.”
That’s the real point of Meritage as a lens in this market: when demand changes and changes, when incentives keep creeping, and when everyone wants to specify the specs, operators who can control the launch, control the mix of a certain stage, and choose where they can chase the volume will often be the first to show that the margin can be sustained without sacrificing the business model.
Meritage tells you, apparently, that Q4 was the quarter they chose to hold back—because they believed that Q1’s inventory returns would be better than Q4’s returns. They are now targeting a 2026 closing and “consistent” revenue by 2025, “assuming no changes in market conditions.”
In a market where “every competitor buys to sell,” that “takeover” clause is a whole ball game.
