Stuart A. Miller
Tim, that’s a great question and I strive to get the answer to that question at each division as I have gone out and the answer is it’s very different in each of our divisions and so when you roll it up and try to look at it on a national basis any of those percentages really, they don’t apply.
So, let me first correct the first piece of information. We said 12% in reduction in square footage, it was a 20% reduction in construction cost. So the reduction in construction cost derives from the following places. You are right, in part it derives from square footage, in part it derives from the reduction in features included in the home, and in part it’s materials and labor cost and I would have to say and it is a guess because it would be a compilation of a lot of different divisions with a lot of different data points but my guess is it’s probably about 50% from pure construction cost reduction and 50% from efficiencies in the home itself and when I say reductions in square footage I mean reducing the number of inclusions and then I don’t think I would include in that equation the efficiencies that come from cycle time reduction. We would see those flow through more in the finance cost, in the interest on assets deployed and so that efficiency would show up in a different place so it wouldn’t be part of that equation and the efficiencies we are seeing in the way that our field is structured would flow through G&A. So on the pure cost side I’d have to say that it is probably somewhere around 50% is just renegotiating contracts, 50% comes from efficiencies and what we are producing and there’s another peak that is interest reduction by having fewer assets employed for shorter periods of time, and then another piece in the SG&A part where we have reduced what it takes to have in the field to actually build the homes or our purchasing departments that have been regionalized.
Timothy Jones – Wasserman & Associates
Good answer. Thank you.
Operator
Our next question is coming from Megan McGrath of Barclays Capital. Your line is open.
Megan Talbott McGrath – Barclays Capital
Hi, thanks. I just wanted to follow up on a couple of earlier questions. First, a different way to ask I think a little bit what Nishu was asking around tax, which is if we have seen the California Tax Credit put some momentum into the market and assuming that the Federal Tax Credit does not get extended at the end of the year, are you looking out six months ahead and thinking about building more specs toward the end of the year to ensure that buyers can close on the home by the end of the Federal Tax Credit.
Stuart A. Miller
No, we are really keeping our spec level very close to the demand levels that we are seeing in the market currently and in areas like California we are anticipating that those demand levels will trail off and make the assumption that we are not going to see an extension of the program for the time being. That’s why you have seen our starts go down. We are really trying to keep very tightly focused on where we see the market going assuming the worst and hoping for the best.
Additionally, it’s why we are so focused on getting the cycle time down. I guess I spend a lot of time in the field with (inaudible) and there isn’t a time that goes by where he is not drilling down on what is the cycle time and how are we bringing it down and how are we getting focused on maximizing or minimizing the number of days it takes to build a home because we want to make sure we have the fewest number of specs anticipating that the market has some more downside risk.
Megan Talbott McGrath – Barclays Capital
Okay, thanks and just a follow up. While there is talk in the last couple of weeks on mortgage rates just wondered if you had any actual color or anecdotes where you have been hearing from people out in the field of the impact of these higher rates. Is it actually forcing folks to walk away just bringing fewer people in the door?
Stuart A. Miller
No, higher rates are clearly impactful, directly impacting affordability. It’s very clear that the Federal Government is well aware of that as they try to buy mortgages and securities in order to drive rates down. It’s not all that effective but in the field it is very clear that as rates have picked up you get an increase in traffic in purchases, people wanting to purchase but that dissipates pretty quickly as people are priced out of the market. The first impact comes from the fact that people want to get in before rates get away from them. The second impact is, as people start to take a look at their payments, the payment has been taken out of the affordability range and so we see a subsidence.
So far we are still at historically low interest rates so there’s still, I don’t want to say strong demand but there’s demand out there but we are threatened clearly by interest rates getting away from us and driving affordability down.
Megan Talbott McGrath – Barclays Capital
Okay, great. Thank you.
Operator
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