We intended to dig into LGI Homes’ fourth-quarter and full-year 2025 earnings last week.
Then the National Association of Home Builders’ International Builders’ Show happened in Orlando, and the days became a blur of conversations, walking meetings, and on-the-fly triangulation among builders, capital partners, manufacturers and operators trying to answer the same question in different ways:
Is the entry-level buyer coming back — or have we entered a longer, flatter chapter where “attainability” is mostly an incentives-and-bydowns race to the bottom?
That’s why LGI deserves our full exploration in The Builder’s Daily.
Few public homebuilders have built as consistent a machine around converting renters into buyers – 80,000 homes since the company came to be. LGI’s strength has long been its ability to manufacture a clear, monthly-payment-driven value proposition and match it with standardized product, disciplined execution, and fast-cycle construction management.
When the “rental refugee” buyer can see daylight — when rent pain is acute, when financing is reachable, when payments feel rational — LGI’s operating model tends to show it early.
But over the past two to three years, the math that powers that model has been under assault. New-home price inflation did not arrive alone. It arrived with chronically high interest rates, elevated taxes and insurance, and a consumer who is more fragile than headline employment numbers would suggest. Add in rent growth that has flattened — and in some Sun Belt markets softened — and one of the catalysts that helped LGI pull renters across the line has gone neutral.
Add in the macro zeitgeist of uncertainty and a missing-in-action-fear-of-missing-out motivating force, and you’ve got where we are.
So the right question is not whether LGI’s Q4 was good or bad. The right question is: What does LGI’s posture going into Spring 2026 tell us about where the entry-level buyer actually is, and what must change for them to move?
The hard results, and the “why”
In the fourth quarter, LGI reported home sales revenue of $474.0 million on 1,301 home closings. Total closings were 1,362, including 61 currently and previously leased homes. Average sales price per home closed 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 home sales revenues on 4,685 home closings, with total closings of 4,788 including 103 currently and previously leased homes. Average sales price per home closed was $364,035. Adjusted gross margin for the year was 24.0%. LGI ended the year with 144 active selling communities, and ending backlog of 1,394 homes valued at $501.3 million.
Those are the baseline details. The quintessential homebuilding story, however, is what team LGI management had to do to produce them.
On the call, LGI Chairman and CEO Eric Lipar said the team leaned into a familiar set of affordability levers to clear older inventory and keep pace: “buy-downs,” “forward commitments,” “aged inventory discounts,” and “pricing adjustments.” He framed the quarter’s margin performance as resilient in context, but also clearly a function of how hard the company had to push to rightsize inventory.
Chief Financial Officer and Treasurer Charles Merdian, in turn, commented that gross margin excluding inventory-related charges were down from a year earlier, driven primarily by financing incentives, discounts on older inventory, a higher percentage of wholesale closings, and higher borrowing costs. LGI also took an inventory impairment charge of $6.7 million tied to four underperforming communities – i.e., homes selling at negative net margins vs. the expected return on assets in the purchase price of the lots.
Put those pieces together and the portrait becomes clearer: LGI is operating in a market where selling homes at its core attainability price point has become less about demand generation and more about catalyzing payment capability — and then managing the fallout.
Cancels count
Margins, always critical, may not have been the most telling data point. That distinction may instead go to the cancellation rate.
Lipar pointed to elevated fallout tied directly to financing pressure, with the company’s full-year cancellation rate at 32.8%, reflecting how close many entry-level buyers are to qualification thresholds in today’s rate environment.
He also pared the reason down to its plainest English explanation: “The reason for cancellation is strictly the ability to get financing.”
This is the point strategic leaders need to appreciate, because it is not a marketing issue. It is not a traffic issue. It is not even mainly a product issue. It is qualification friction – the widening gap between what a household can commit emotionally and what they can afford financially.
LGI’s response is to keep more buyers in process longer. Lipar said many need time to save for a down payment, strengthen credit, or resolve contingencies. The company appears willing to tolerate higher fallout to preserve a larger funnel, because some portion of those buyers will eventually “reach the finish line.”
That decision signals how the business must behave when affordability becomes structural rather than cyclical: more patience, more processing, more variability — and more operational demand on sales, mortgage, and construction teams to keep the machine moving.
Backlog: Real Demand, Wholesale Demand, and a Market Telling You Something
LGI’s backlog dynamics were the bright spot in the release and a nuanced one on the call. The company reported backlog up 133% year over year, to 1,394 homes, and noted an agreement with a wholesale buyer to deliver 480 homes over the course of 2026. Excluding that wholesale contract, management said backlog was still up 53% versus year-end 2024.
That matters. It suggests there is real demand formation occurring — but demand that is fragile, slower to convert, and heavily dependent on the affordability tools builders are using to keep monthly payments within reach.
Wholesale – i.e., selling new homes to build-to-rent developers and investors – also plays a deeper strategic role here: it can stabilize volume and help with inventory posture, but it can also be sensitive to policy and capital conditions. Lipar told analysts LGI expects wholesale to be 10% to 15% of closings in 2026 and said new wholesale orders were “somewhat on pause” while the company awaits policy clarification.
For the broader builder universe, the lesson is not “wholesale good” or “wholesale bad.” The lesson is that entry-level volume is increasingly a blended strategy — retail plus institutional – and when either side of that blend tightens, the whole system becomes more volatile.
The guidance Ievel-set: torque vs. strain
LGI’s 2026 guidance is straightforward: 4,600 to 5,400 closings, average sales price between $355,000 and $365,000, gross margin between 18% and 20%, adjusted gross margin between 21% and 23%, and SG&A of 15% to 16% of revenue.
That is not a “snapback” guide. It is a “work the problem” guide. It assumes the market conditions LGI sees now persist.
And that, in itself, is revealing. A company built to convert renters into owners is telling you, in effect, that the near-term environment still does not offer the first-time buyer enough of a reason — enough rate relief, enough confidence, enough payment breathing room — to assume a clean demand rebound.
Wolfe Research captured the paradox succinctly: LGI has “the greatest torque to an improving market” precisely because its buyer is the most affordability-constrained. But Wolfe also emphasized that this same exposure makes the current environment particularly tantalizing.
Wolfe noted Q4 adjusted EPS of $0.97 excluding the $6.7 million impairment, and pointed to revenue and gross margin coming in softer than expected. Wolfe’s core point, though, is strategic: LGI’s absorptions are running far below long-term norms, and the path back is not simply a matter of better execution. 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 want the cleanest explanation for why this story is not over – and why it may turn quickly once it turns – NAHB’s priced-out research provides it.
NAHB’s Na Zhao reported that at the start of 2026, with the 30-year fixed rate around 6.25%, about 31.5 million households could afford a median-priced new home at $413,595, requiring a qualifying income of $124,336. A modest 25-basis-point rate reduction from 6.25% to 6.0% would price-in 1.42 million additional households.
That’s count-on-your-fingers, back-of-the-envelope arithmetic.
Zhao’s second analysis underscores how tight the threshold is in the other direction. At $413,595 and a 6% mortgage rate, about 88.2 million households are priced out – roughly 65% of U.S. households. And if the median new-home price rises by just $1,000, that alone prices out an additional 156,405 households, because a small payment increase pushes qualification into income bands with extremely high household density.
This is the knife edge LGI lives on. It is also the knife edge a lot of private builders live on, whether they say it out loud or not.
The old downturn question: V-shaped or U-shaped recovery?
So where is the inflection?
It won’t come with a headline. It will first show up in a few quiet places: cancellation rates easing; incentives stabilizing rather than escalating; absorption improving without a deeper “race to the bottom”; backlog converting more cleanly; aged inventory shrinking.
If those signals start to align and get traction, LGI may be one of the first builders to show it – because its customer is closest to the affordability border where small changes matter most.
But if those signals do not appear, the implication is equally important: it means the industry is still asking the entry-level buyer to do something they cannot yet do – not emotionally, not aspirationally, but financially.
That’s the CEO-level strategic and tactical challenge heading into Spring 2026’s higher gearshift:
“Are we building strategies around ‘attainability’ as a branding concept – or are we building operating models that can survive, and even win, in a market where qualification friction is the defining constraint?”
LGI’s latest call suggests the answer, right now, is survival through discipline, incentives and patience – while waiting for the math to shift. The moment it does, the torque Wolfe describes can work in the other direction. Until then, the rental refugee buyer remains present – but still waiting for a reason to believe the leap is possible.
The most likely answer of all is one we’ll only know with 20-20 hindsight.
English (US) · 