Company Reports

D.R. Horton’s fiscal second-quarter (ended March 31) results exceeded our expectations as the no-moat-rated homebuilder’s affordable price points (relative to both other builders and the existing home-sale market) and ample inventory of completed unsold homes (or speculative homes) have attracted more buyers. D.R. Horton delivered 22,548 homes during the quarter, handily above management’s guidance of 20,000-20,500 homes, due to stronger-than-expected demand for its spec homes. Management said 54% of homes were sold and closed during the quarter, versus the historical average of 35%-40%. D.R. Horton ended the quarter with 27,600 unsold homes in inventory, of which 7,300 were completed. We think a disciplined speculative building strategy is an effective tactic for homebuilders considering the supply-constrained existing home-sale market.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Shares of D.R. Horton sold off on Jan. 23 after the no-moat-rated homebuilder reported fiscal first-quarter earnings that missed the FactSet consensus estimate, likely due to worse-than-expected home sales gross margin during the quarter. Gross margin declined 220 basis point sequentially and 100 basis points year over year to 22.9%, and EPS of $2.82 fell about 2% shy of consensus expectations. Management said approximately half of the sequential margin decline was due to higher sales incentives on closed homes while the other half was the result of mark-to-market adjustments on hedging instruments tied to mortgage rate buydowns—a popular sales incentive to improve affordability amid elevated mortgage rates. Management doesn’t expect another outsize hedging-related charge but nevertheless expects little sequential change for second-quarter gross margin (guidance is 22.6%-23.1%) as the homebuilder delivers homes sold with higher incentives.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

D.R. Horton closed out its fiscal 2023 with good fourth-quarter (ended Sept. 30) results. While homebuilding revenue declined 6% year over year, total revenue increased 9% thanks to robust sales activity from D.R. Horton’s growing multifamily business. And while EPS of $4.45 declined 5% year over year, it topped the FactSet consensus estimate by 12%. After five consecutive quarters of new orders declining year over year, orders turned positive last quarter and a strong rebound continued during the fiscal fourth quarter. Furthermore, management’s fiscal 2024 outlook for home deliveries and consolidated revenue exceeded our previous projections. We’ve raised our fair value estimate approximately 2% to $124 per share primarily due to the time value of money as our forecast adjustments had a net neutral effect on valuation.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

Prospective homebuyers in the United States face both affordability challenges (due to elevated mortgage rates and high home prices) and a limited supply of existing homes for sale (due in part to the so-called rate lock-in effect). New residential construction has been a solution to both problems; many homebuilders have boosted production and have offered greater sales incentives and lowered prices to improve affordability. D.R. Horton has always been one of the more affordable homebuilders, at least compared with public peers, but the firm has clearly benefited from its pricing actions. Indeed, fiscal third-quarter new orders surged 37% year over year, and orders were up by a double-digit percentage across all regions. New-order average selling price declined approximately 8% year over year to about $381,000, which is 7% below the median sales price of $410,200 for existing homes.

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Shares of D.R. Horton traded higher on April 20 after the no-moat-rated homebuilder reported surprisingly strong fiscal second-quarter results. The firm delivered 19,664 homes during the quarter, 19% above the midpoint of management’s guidance, and total sales of $8 billion exceeded guidance by a whopping $1.5 billion. We think shorter construction cycle times (that is, the amount of time it takes to complete a home) and reduced unsold completed home inventory were primary factors behind D.R. Horton’s home delivery outperformance. Management said cycle times decreased by 12 days during the quarter, which we think is a function of improving building materials supply chains and better labor availability (due to slowing market conditions).

D.R. Horton is the largest U.S. homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Shares of no-moat D.R. Horton traded higher on Jan. 24 after the homebuilder released its fiscal first-quarter 2023 results (ended Dec. 31). We believe the market reacted favorably to management’s cautiously optimistic commentary on recent sales trends. Management said sales activity increased during the first few weeks of January, and cancellation rates, while still elevated, improved slightly. Management is also optimistic that normal seasonality will return (typically, second-quarter orders increase 50% sequentially).

D.R. Horton is the largest U.S. homebuilder (by volume) with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.