Smith Douglas Homes doubles down on pace despite margin pain

Most homebuilders grinding through a weaker-than-expected first half of 2026 have slowed their new-home production pace to protect margins, work through standing inventory and rebalance starts with new orders.

Smith Douglas Homes, ranked 27th on HousingWire’s Homebuilder Rankings, wasn’t one of them. 

During the builder’s Q1 earnings call in April, Smith Douglas Homes executives stated that they plan to prioritize pace over price, despite a relatively weak demand environment. On the company’s Q2 2026 earnings call held on Thursday, executives remained committed to this strategy. 

During Q2, home closings increased 25% year over year, home closing revenue was up 22%, net new home orders increased 32% and backlog homes moved up 17%. At first glance, these results convey success. 

The bad news? The builder’s gross profit margin fell to 17.6%, down 560 basis points compared with a year ago, and the average sales price fell 3% to $325,000. Smith Douglas Homes, which primarily serves the entry-level buyer segment, is highly sensitive to rising mortgage rates and affordability pressures. As a result, the company had to “buy” many of their sales with generous incentives and discounts. 

Still, executives remain committed to this high-paced growth strategy, despite acknowledging that further margin pressure is likely on the horizon. 

Incentives remain a key lever as margins compress further

During Thursday’s earnings call, Smith Douglas Homes CFO Russell Devendorf reiterated the company’s pace over price philosophy as a long-term strategy that is experiencing short-term headwinds. 

“Our pace over price philosophy continues to guide how we manage the business. In the current environment, our focus remains on maintaining absorption and inventory turns, even if that requires some pressure on margins in the short term,” Devendorf said. “We believe maintaining sales pace allows us to preserve market share, generate cash flow, continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle.”

While this pace over price strategy helped Smith Douglas Homes gain market share, it also resulted in a steeper margin decline than most public homebuilding peers over the past year.

This underscores a key tradeoff in today’s homebuilding market – prioritizing sales volumes, particularly at affordable price points, requires aggressive discounts and incentives that come at the expense of profitability. The builder spent, on average, 7.8% of the base value of its home sales on incentives, up from 4.8% a year ago. 

“[The margin pressure] is really just a function of adjusting price and payment through the use of incentives, closing costs and forward commitments to get that pace. That’s what I would tell you,” Devendorf said. 

Smith Douglas Homes CEO Greg Bennett acknowledged that the company has “leaned back in a little more on forwards and some rate purchases as the rates have gone back up” from July into August. However, the builder isn’t leaning into adjustable-rate mortgages (ARMS) as some its competitors are doing 

Despite the short-term drop in margins, Devendorf sees scale as a meaningful avenue to profitability. 

“We also recognize the need for us to continue to scale our business, right? In a declining rate environment or the housing environment we’re in, you’ve got top-line margin compression. Scale is probably the best lever to pull to continue to generate positive returns,” Devendorf explained. 

However, the key question for Smith Douglas Homes is: where will margins bottom out, and how much longer can the company post a profit amid falling margins? In keeping with its pace over price strategy, Smith Douglas Homes is guiding to a 16.0% to 16.5% gross profit margin during Q3, indicating that margins will further compress, at least in the short-term. 

“My guess is, in the third quarter, the total of all those incentives are probably going to also be up, and that’s the driver of the margin compression,” Devendorf said, explaining that lot costs and construction costs are expected to stay flat. 

Determining a margin floor

When asked if there was a margin floor that Smith Douglas Homes set for itself, Devendorf offered a candid response. 

“If you wanted a number, I’d tell you, at 15%, that’s when we’d start saying, ‘Okay, what other levers could we or should we pull?’ That’s probably the floor,” Devendorf said, acknowledging that anything lower would result in negative profitability. “Look, nobody wants to build for practice.”

This 15% margin floor is partially because Smith Douglas Homes now spends 15% of revenue on SG&A spending. Devendorf explained that the company is beginning to tighten its ship and is looking for opportunities to reduce SG&A spending little by little. As part of this, management has implemented a hiring freeze for non-essential roles, essentially limiting new hires to revenue-generating field positions. Other cost-cutting measures include reducing travel and meetings as part of a company-wide effort to preserve profitability.

A commitment to the affordable segment

Some builders have shifted away from or deemphasized the affordable segment, but Smith Douglas Homes reiterated its commitment to delivering affordably priced homes. The firm has one of the lowest average sales prices among public homebuilders, at $325,000. While this price point typically generates tighter margins, Devendorf sees price as a key differentiator for its buyers in Georgia, Tennessee, Alabama, Texas and the Carolinas. 

“We always say price is the ultimate amenity. Having that low price is key. We’ve been pushing on that. Again, we’re trying to really look at our incentives and see what the optimal use of incentives is and where we can pull back to then kind of recapture or at least maintain margin,” Devendorf said. 

Delivering a product that is more affordable than competitors remains a key part of Smith Douglas Homes’ strategy. 

“When we underwrite, we’re always trying to underwrite at least $10,000 below the lowest competitor so that there’s obviously more people that can afford our homes than anybody,” Devendorf added. 

Build-to-order strategy comes under pressure

Smith Douglas Homes has historically focused on build-to-order (BTO) sales. BTO homes, which require fewer incentives and come with more upgrades, typically generate about 150–200 basis points higher gross margins than spec homes. However, this margin differential has narrowed from roughly 300 basis points historically because of today’s more incentive-driven market, executives noted. 

“We focus on getting the home sold by drywall. That allows that house to still close on its intended close date when we started it,” Bennett explained. 

However, this historical emphasis on BTO came under fire in recent years. About 90% of orders pre-COVID came from BTO sales, but that share is now down to 70%, with specs accounting for the remaining 30%. This is a function of the current demand environment. 

“Just to be clear, we never moved away from BTO. It was just a function of the market and the demand environment,” Devendorf explained.