back half is going to look like from an incentive and absorption standpoint so it's it's 100 tied to the community count growth that we expect in the back half of this year and then remember just for us the way that we count an active community as a sale and for us we don't sell until we're ready to close within 60 days so so for us an active community can start producing closings same quarter that it becomes active not just sales in the same quarter that it becomes active so we have quite a ramp uh of communities that's coming up if you look at where we started the year and that five to ten percent uh guide on ending community count where all of those will be delivering closings yeah that's a great point our our starts were up because we were starting homes

for these communities that we're getting ready to open and we don't open up communities until we can close close homes yeah that makes a lot of sense guys thank you thank you we'll take our next question from susan mclari with goldman sachs please go ahead your line is open thank you good morning everyone thanks for taking the question i want to start on the cost side the six percent savings that you've realized is impressive there can you talk a bit more about what is driving that and how you're thinking about the ability to realize further incremental benefits in the coming quarters yeah so the 6% savings year-over-year and we're

down 2% sequentially it's both labor and materials we saw it sort of broad base we're seeing some savings in both categories as he would note in her prepared marks that are lower cost new stars are replacing age inventory which is being captured in the third quarter on 26 gross margin guidance I'm not sure we're anticipating further cost savings on new starts that are going to go out in q3 we are seeing a little bit of headwinds in lumber that may play out here over the next couple quarters so due to that factor we're not modeling any more improvements from here for now okay all right

that's helpful and then maybe as we think out and you reiterated the longer term target for the gross margin as you think about the the next shift that will come through as you start to integrate more of the move up product in there what does that mean in terms of the path for profitability in the business and how should we think about the shift that will come through and how you can hit that target well I think the long-term target of twenty three and a half to twenty three and a And so right now, we're not achieving our underwriting because primarily incentives are running extremely hot.

We typically underwrite land at a much more normal incentive environment. So the bridge between where we are and the bridge to where we want to be is 100% interest rate and incentive related. Now, 1MU land should typically be higher revenue, and you should get more leverage from the higher ASP. but we don't really underwrite 1MU land at a higher margin than we underwrite entry-level land. And, again, this will take some time. We have about 10% of our business is 1MU right now, and there's probably some opportunity to pivot some of our existing land book to 1MU because they're in the right locations. But most of it's going to come from new land that we're sourcing today, So the impact of the mix to 1MU won't really play out in our P&L until 2029 and beyond.

Okay. Thank you for the color. Good luck with the quarter.

Thank you. We'll take our next question from Rafe Jedrosich from Bank of America. Please go ahead. Your line is open.

Hi. Good morning. Thanks for taking my questions. Just on the following up on John's question earlier, On the second half delivery guidance relative to the first half, I think it's about 1,000 more deliveries. And if I look at the backlog and completed specs, it's sort of flattish. Do starts need to pick up further from here on that to hit the back half delivery guidance?

And can you give any color on, like, the community count cadence third quarter versus fourth quarter? yeah i mean we don't give community count cadence it's just way too difficult a municipality approves something you drop below or doesn't approve something you drop below a certain number of units and then you can no longer count a community is active so it's just way too way too refined for us to try to figure out the the specific timing uh you know on a september 30 versus december 31st but we're still really comfortable with our five to ten percent growth year over year and obviously as you're running it through your model and trying to hit that full-year units number that we are fairly comfortable with at the 5% below full-year 2025. There is a ramp-up in volume, but as Philippe already mentioned, it's a function of the community count. So you already started to see a little bit of that spec start happen now, right? Our start's volume increased quite a bit between Q1 and Q2 as we're getting inventory ready for these communities again that four to four to six month supply of available inventory is something that we're very focused on so i think we mentioned several times during the prepared remarks between the inventory that we are carrying to start q3 and into q4 and that sub 110 day cycle time we feel really confident that we have everything that we need to hit our full year guidance okay that's helpful and then can you just remind us that the um the lag time between when lumber prices move and when that starts to show up in your deliveries it's staggered we don't we don't hedge but we have 30 60 or 90 day locks um at different points in time throughout the country so we kind of create natural hedges So it's a little bit of noise, but within 90 days, you should start to see some of it flow through into our construction, and then you should see that flow through into our numbers in about a quarter. So I think a couple of our peers said about two quarters, and I think that that's probably the right number for us as well.

That's helpful.

And we'll take our last question from Jade Romani with KBW. Please go ahead. Your line is open.

Thank you very much. Just on the first-time move-up strategy, have you considered broadening that to beyond first-time move-up to the broader move-up market?

No. I think, again, we've had this strategy in place for a long time. We feel like with our operating model and the way we want to play in the market and where the demographics are the strongest, we want to stay in that 1MU price point. we don't want to expand beyond that into a 2mu or a luxury buyer those folks typically want choice and customization which we're not going to offer um based on the way we build homes so for those reasons it's really mostly a value focused 1mu consumer segment thank you very much and on land banking i was wondering what you thought the value that it provides is to a company like Meritage when the cost of debt is lower than what firms such as Blackstone

are offering in the land banking space?

Yeah, I mean, it's a good point. It's why we haven't done a lot of land banking over the last, you know, five years. That reason, we were sitting on a bunch of cash, and then the price of land banking was pretty expensive and the optionality of land banking has really changed but at some point as a company of our size we believe land banking allows us to control more land uh to allow us to grow our business at a better return on equity so at some point it makes sense when your balance sheet reaches a point where that extension creates that incremental value um so that's how we think about it it's why we haven't done it a lot it's why we're trying to get it to you know 40 percent over time because we would like to as we're trying to grow from 15 to 20 000 units we want to control more land for less of our balance sheet at play makes sense thanks okay well thank you everybody thank you operator i want to thank everyone who joined this call today for your continued interest in marriage homes we hope you have a wonderful rest of your day and a great weekend this concludes today's meritage home second quarter 2026 analyst call please disconnect your lines at this time and have a wonderful day