There is a comforting version of the current housing story that says spec homes are simply what today’s buyer wants, and there is enough truth in that statement to make it dangerous. Buyers stretched by affordability, uncertain about rates and reluctant to commit months before completion increasingly want to see the house, understand the payment and know exactly when they can move, which has pushed builders toward inventory homes because those homes remove uncertainty from a transaction already carrying more than enough of it.
M/I Homes’ third-quarter results show just how far that shift has progressed. Eighty percent of the company’s sales during the quarter came from inventory homes, approximately 35% of its closings were homes that were both sold and delivered during the quarter, and M/I ended September with 3,242 total inventory homes while operating 246 communities. The strategy is clearly producing transactions in a market where transactions have become harder to produce.
But the quarter also carries a warning the industry should not ignore. New contracts went from up 15% in July to down 16% in September, while M/I finished with 5,200 homes in the field and acknowledged that demand, not land, labor or production capacity is now the biggest constraint. That creates the tension behind the spec-home arms race: when buyers are active, inventory creates certainty and drives sales, but when demand slows, those same homes become aging capital that can require deeper incentives and margin concessions to move. With 80% of M/I’s sales now coming from inventory, the question is no longer whether specs work, but how much inventory builders can carry before today’s competitive advantage becomes tomorrow’s exposure.
Inventory Has Become the Product Today’s Buyer Is Willing to Buy
The shift toward inventory homes makes sense because today’s buyer is being asked to make a major financial decision in an increasingly uncertain environment. Mortgage rates climbed from roughly 6.75% in July to 7.75% by the end of September, making a contract on a home six or eight months from completion a bet on future rates, payments and personal circumstances. A completed or near-completed home removes much of that uncertainty, and M/I has positioned itself effectively for this buyer, with half of third-quarter sales coming from first-time buyers, roughly half from its affordable Smart Series and an extraordinary 96% mortgage capture rate. Pair an available home with a rate buydown, and the builder is no longer simply selling a house; it is selling certainty around the product, payment and closing date.
That is why the spec strategy should not be mistaken for reckless building, because in many communities inventory has become exactly what the buyer wants. The risk begins when that successful strategy becomes industry doctrine and every builder responds by producing more of the same product for a buyer pool that may be shrinking. If immediately available supply grows faster than qualified demand, the competitive advantage disappears and the inventory itself begins competing for the buyer. At that point, the battle is no longer simply new construction versus resale, it is spec versus spec.
A Spec Home Is an Asset Until the Calendar Turns Against It
Builders tend to see inventory operationally (slab, frame, drywall, completion and closing), but every step also moves capital further away from flexibility. Raw land can be delayed, future phases re-sequenced and starts reduced, but a completed house cannot be unbuilt. M/I ended the quarter with 721 completed inventory homes, down from 776 a year ago, while total inventory increased from 3,001 to 3,242. That suggests discipline rather than uncontrolled accumulation, particularly since management has already reduced starts somewhat as conditions weakened.
The larger warning is that M/I said it has the land and labor capacity to build another 1,000 to 1,500 homes annually if the demand were there. That distinction matters because the constraint is no longer the ability to produce homes; it is the customer’s ability and willingness to absorb them at an economically acceptable price. Once that happens, every additional start becomes a capital-allocation decision based on future demand, pricing and incentives. A spec home does not become dangerous simply because it is unsold; it becomes dangerous when the builder needs the buyer more than the buyer needs the house.
The Arms Race Begins When Everyone Is Chasing the Same Buyer With the Same Weapon
Homebuilding is local, but competitive behavior spreads quickly: one builder uses quick-move-in homes to improve conversion, another adds specs to protect share, and soon incentives follow until yesterday’s advantage becomes today’s price of admission. That pressure intensifies as builders add communities while demand weakens; M/I’s community count rose 6%, while revenue declined 5%, pretax income fell 38%, gross margin excluding inventory charges dropped 320 basis points to 21.3%, and incentives increased through the quarter. Specs did not cause that margin decline (management primarily pointed to higher rate-buydown costs and lot costs), but the competitive connection matters because buyers can now compare immediately available homes based on monthly payment, forcing builders to compete with increasingly similar tools. The first builder offering a compelling rate buydown has an advantage; the tenth builder offering one simply has a new cost of doing business.
The Most Dangerous Inventory Number May Not Be the One on the Balance Sheet
Completed specs are the most visible measure of inventory risk, but they are also a lagging indicator because the decisions that create tomorrow’s finished inventory were made months earlier when starts were authorized. M/I’s 721 completed inventory homes are actually down from 776 a year ago despite having more communities, suggesting that finished inventory remains controlled. The more important forward-looking number may be the 5,200 homes currently in the field, not because they are all speculative, but because they represent the production pipeline that must ultimately move through whatever demand environment comes next.
That makes starts one of the most important leading indicators in homebuilding. Waiting until completed inventory becomes excessive can mean reacting months too late, while cutting too aggressively can leave sales centers without the inventory today’s buyers increasingly demand. The right spec level therefore depends on absorption, cycle time, cancellations, incentives and competitive supply at the community level, which is why M/I’s measured reduction in starts matters. The question is not simply how many specs a builder has; it is how quickly leadership recognizes when homes started for yesterday’s absorption have become too many for tomorrow’s buyer.
The Housing Conversation Builders Need to Have Now
M/I’s quarter exposes the contradiction the industry now has to manage: buyers increasingly want inventory, but demand can deteriorate faster than builders can adjust the production pipeline. With 80% of M/I’s sales coming from inventory while contracts swung from up 15% in July to down 16% in September, the lesson is not that M/I has too many specs (it clearly does not) but that a strategy working today can become exposure surprisingly quickly when every builder begins chasing the same buyer with the same product, incentives and monthly payment. The winners in the next phase will not necessarily be the builders with the most inventory or the least, but those disciplined enough to recognize when the market has changed before their inventory forces them to react. In a spec-home arms race, the greatest risk is not being the first builder to slow down, it is being the last builder who still thinks they need one more start.
