D.R. Horton Earnings: New Orders Surge as Buyers Turn to New Construction

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 DHI 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.

These pricing actions have lowered gross margin, but D.R. Horton’s third-quarter home sales gross margin of 23.3% exceeded guidance of 21%-22% and increased 170 basis points sequentially, Still, gross margin was 680 basis points lower than last year when the homebuilder enjoyed unprecedented pricing power. Management sees a better fourth-quarter gross margin, ranging from 23.5%-24%. We continue to model a long-term margin of around 22%.

D.R. Horton now expects to deliver 82,800-83,300 homes this year, up from 77,000-80,000. Raised delivery guidance is likely due to stronger-than-anticipated demand and quicker build times (due to greater availability of both labor and materials). Management’s new delivery guidance is roughly in line with 2022, when 82,744 homes were delivered.

We’ve raised our fair value estimate 3% to $120, mainly because D.R. Horton’s growing rental operations business has become a larger contributor to consolidated results than we previously modeled. The homebuilder has 7,570 single-family rental units and 8,800 multifamily units in inventory.