D.R. Horton: Building Value for Homebuyers

10/15/2019 5:00 am EST


Chris Graja

Senior Analyst: Retail, Argus Research Corporation

We believe that annual economic growth of 2% in 2019 should continue to support the job market and give millennial-generation buyers the confidence to buy their first homes, notes Christopher Graja, analyst with the independent research firm Argus Research.

We believe that D.R. Horton (DHI) is well positioned to serve this market with its Express Homes brand, which offers homes at about $240,000, representing about 34% of closings and 2% of homebuilding revenue in 3Q19.

Based in Fort Worth, Texas the company the largest homebuilder in the U.S., with 51,857 closings for the fiscal year ended September 30, 2018. The company offers homes in 87 markets within 29 states. The Southeast was the biggest revenue contributor, with 29% of the total in FY17. About 90% of revenue is from single-family detached homes

What has changed over the last year is that several years of rebounding home prices have outpaced income growth and raised the cost of home ownership.

A surge in interest rates, before the recent decline, was a catalyst for some potential buyers to reevaluate their purchasing plans. While we do not believe that these factors have ended the housing recovery, they have caused investors to reevaluate the price they are willing to pay for new homes and the companies that build them.

Interest rates have nonetheless declined from their November 2018 highs. Going forward, we expect mortgage rates to remain affordable. We also expect an acceleration in household formation in a strong job market. At the same time, we expect builders to emphasize home designs that are smaller and more efficient to build in order to keep prices affordable.

This is an area where DHI appears to have an edge on many rivals. Almost 70% of the homes DHI has delivered in fiscal 2019 sold for under $300,000, a sign that DHI is well positioned to serve the value-conscious buyers who are likely to drive the housing market over the next several years.

We have provided a detailed analysis of affordability in some of our recent notes. We won’t repeat that here, but our conclusion is that we do not expect home prices to rise much faster than incomes over the next few years.

We expect large builders to take market share from smaller builders. We look for DHI to benefit from its range of brands for high-end and especially entry-level homebuyers. D.R. Horton should also benefit from its broad geographic diversification and healthy balance sheet.

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