Why Century and Meritage ended Q3 with too much inventory

Last week, we wrote that Q3 2026 results would show which builders adopted a cautious approach to inventory, and which ones had elevated levels of homes under construction and would likely need to increase incentives to reduce inventory before year-end. The third-quarter results show that many builders were caught off guard by the abrupt slowdown in demand in September, which has continued through October. This left them with excess inventory at the end of the third quarter, requiring even higher incentives and price cuts to reduce inventory before year-end. Among the public builders, Century Communities and Meritage have stood out (based on their homes under construction and backlog levels as of the end of Q2), and their Q3 results also showed concerning levels of homes under construction relative to backlog. Consistent with elevated inventory and the need to drive volume with incentives, Century noted that it expects incentives to increase by an additional 2-2.5% of the average selling price in Q4, compared with Q3, when incentives already represented 13% of the average selling price. We see risk that this estimate may not go far enough, given the challenging absorption trends in...