We intended to dig LGI Housing‘ Earnings for the fourth quarter and full year 2025 last week.
Then i National Association of Home BuildersThe ‘International Builders’ Show took place in Orlando, and the days became a blur of discussions, walking meetings, and a walking triangle between builders, financial partners, manufacturers and operators trying to answer the same question in different ways:
Is the entry-level consumer making a comeback – or have we entered a long, lean phase where “affordability” is often a race to the bottom with promotions and discounts?
That’s why LGI deserves our full review Builder’s Day.
Few social housing developers have built a consistent machine for converting tenants into buyers – 80,000 homes since the company’s inception. LGI’s strength has long been its ability to create a clear, driven monthly premium value proposition and match it with a standard product, robust manufacturing, and rapid construction cycle management.
When a “rental refugee” buyer can see the light of day — when rent pain is high, when financing is affordable, when payments sound reasonable — LGI’s operating model often shows it early.
But over the past two to three years, the statistics that power that model have come under attack. The inflation of new housing did not come alone. It has come with higher interest rates, higher taxes and insurance, and a weaker consumer base than the headline employment numbers would suggest. Add in rent growth that has been flat — and in some Sun Belt markets has softened — and one of the motivations that helped LGI pull tenants into line is neutral.
Add to the macro zeitgeist of uncertainty and a loss-in-action-fear-of-loss-out the driving force, and you have arrived where we are.
So the right question isn’t whether LGI’s Q4 was good or bad. The right question is: What does LGI’s positioning to Spring 2026 tell us about where the entry-level consumer is, and what needs to change for them to move?
Hard consequences, and “why”
In the fourth quarter, LGI reported real estate sales of $474.0 million with 1,301 home closings. A total of 1,362 foreclosures were made, including 61 current and former rental homes. The average sales price per closed home was $364,310. Adjusted gross margin for the quarter was 22.3%. (All from the company’s release.)
For the full year, LGI reported $1.7 billion in real estate proceeds from 4,685 home closings, with 4,788 total closings including 103 current and former rental homes. The average sales price per closed home was $364,035. Adjusted gross margin for the year was 24.0%. LGI ended the year with 144 communities for sale, and completed a backlog of 1,394 homes valued at $501.3 million.
That’s the basic information. The quintessential home building story, however, is what the LGI group managers had to do to produce it.
On the call, LGI Chairman and CEO Eric Lipar said the team relies on a standard set of tools to get rid of old inventory and keep up to speed: “purchases,” “forward commitments,” “old inventory discounts,” and “price adjustments.” He framed the quarter’s margin performance as solid in context, but also clearly a function of how hard the company had to push to consolidate inventory.
Chief Financial Officer and Treasurer Charles Merdian, meanwhile, noted that gross margin excluding inventory-related charges decreased from last year, driven primarily by financial incentives, discounts on old inventory, higher wholesale closing percentages, and higher borrowing costs. LGI also took an inventory impairment charge of $6.7 million tied to four underperforming communities — that is, homes selling at a negative discount compared to the expected return on the assets at the lot purchase price.
Put those pieces together and the picture becomes clear: LGI is operating in a market where selling homes in its prime price point has become less about generating demand and more about stimulating solvency – and managing defaults.
Calculation of cancellation
Margins, always critical, may not have been the most telling data point. That difference may go toward the cancellation rate.
Lipar pointed to the high drop directly linked to financial pressure, with the company’s annual cancellation rate at 32.8%, which shows how many entry-level buyers are close to the limits of qualifications in today’s price environment.
He also explained the reason in its clear English explanation: “The reason for the cancellation is completely to be able to get money.”
This is a point that strategic leaders need to appreciate, because it is not a matter of marketing. It’s not a traffic issue. It’s not a product problem. Conflict of qualifications – a growing gap between what a family can do emotionally and what they can afford financially.
LGI’s answer is to keep more consumers active for longer. Lipar said many need time to save a little money, consolidate credit, or deal with emergencies. The company appears to be willing to endure a high drop in order to maintain a large funnel, because a certain portion of those buyers will eventually “reach the finish line.”
That decision shows how business should behave when affordability is structural rather than cyclical: more patience, more processing, more diversity – and more need to work in sales, loans, and construction teams to keep the machine moving.
Lagging: Real Demand, Real Demand, and the Market Tells You Something
LGI’s backlog dynamics have been a bright spot in the release and nuanced in the phone. The company reported a 133% year-over-year backlog of 1,394 homes, and noted an agreement with a major retailer to deliver 480 homes by 2026. Without that wholesale contract, management says there is a backlog. 53% compared to the end of 2024.
That is important. It suggests that there is some real demand building going on – but demand that is fragile, slow to change, and highly dependent on the tools builders use to keep monthly payments affordable.
Wholesale – that is, selling new homes to developers and investors – also plays a deep strategic role here: it can stabilize capacity and help with inventory, but it can also be sensitive to policy and monetary conditions. Lipar told analysts that LGI expects wholesale to be 10% to 15% of shutdowns in 2026 and said new wholesale orders are “slightly stagnant” while the company awaits policy clarification.
In the wider world of construction, the subject is neither “absolute goodness” nor “absolute evil.” The lesson is that entry-level volume is increasingly a combined strategy – sales and institutional – and when either side of that mix is weak, the entire system is highly volatile.
Ievel-set direction: torque vs
LGI’s guidance for 2026 is positive: 4,600 to 5,400 closings, average sales price between $355,000 and $365,000, gross margin between 18% and 20%, adjusted gross between 21% and 23%, and 1% SG of 16% revenue.
That is not a “snapback” guide. It is a guide to “working the problem”. It thinks that the market conditions that LGI is seeing now will continue.
And that, in itself, is revealing. A company built to convert tenants into owners tells you, in fact, that the near-term area still does not give the first-time buyer enough reason – enough ease of measure, enough confidence, enough breathing room to pay – to take a repeat of pure demand.
The Wolfe study captures the paradox in a nutshell: LGI has “the biggest torque in the developing market” because its consumer is so slow to buy. But Wolfe reiterated that this same exposure makes the current environment more attractive.
Wolfe reported Q4 adjusted EPS of $0.97 excluding impairments of $6.7 million, and pointed to revenue and net profit coming in softer than expected. Wolfe’s main point, however, is strategic: LGI’s absorption is operating under long-term trends, and the way back isn’t just a matter of doing better. It’s a matter of the market giving buyers a reason to move – and giving builders room to compete without crushing margins.
Rebound calculus
If you’re looking for the cleanest explanation of why this story isn’t over — and why it might turn around quickly if it does — NAHB’s pricey study provides it.
NAHB’s Na Zhao reported that by early 2026, with a 30-year fixed rate of 6.25%, about 31.5 million households could afford a new median-priced home for $413,595, requiring an income of $124,336. A 25 basis point rate cut from 6.25% to 6.0% will cost an additional 1.42 million households.
That’s your finger counting, back-of-the-envelope math.
Zhao’s second analysis emphasizes how strong the limit is in the other case. At $413,595 and a mortgage rate of 6%, about 88.2 million homes are worth the full amount – about 65% of US households. And if the median new home price goes up by just $1,000, that alone costs 156,405 more homes, because the increase in minimum payments pushes eligibility to income groups with the highest household densities.
This is the knife edge that LGI lives on. It’s also the knife edge most freelancers live on, whether they say it out loud or not.
The age-old regression question: V-shaped or U-shaped returns?
So where is the inflection?
It will not come with a title. It will start to show in a few quiet places: the cancellation rates are going up; stable incentives instead of growth; absorption improves without a deep “race to the bottom”; more clean backlog conversion; old inventory decreases.
If those signals start to sync up and gain traction, LGI may be one of the first manufacturers to show it – because its customer base is close to the threshold of affordability where small changes matter the most.
But if those signs don’t appear, the implication is just as important: it means the industry is still asking the entry-level consumer to do something they can’t do yet – not emotionally, not eagerly, but financially.
That’s the strategic and tactical challenge for the CEO level towards the top gearshift of Spring 2026:
“Are we building strategies around ‘accessibility’ as a brand concept – or are we building operating models that can survive, and win, in a market where the clash of qualifications is the defining barrier?”
LGI’s latest call suggests the answer, right now, is to survive with discipline, encouragement and patience – while waiting for the numbers to change. The moment it does, the torque Wolfe describes can work in the opposite direction. Until then, the rent-seeking buyer remains — but he’s still waiting for a reason to believe the jump is possible.
The most likely answer is one that we will only know with 20-20 hindsight.
