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Housing demand has begun showing signs of stabilizing, buoyed by buyers chasing affordable houses even as higher interest rates and economic uncertainty persist, executives at the nation’s largest homebuilder told investors.
D.R. Horton, the nation’s largest homebuilder by volume, has begun to see housing demand spring back after a run of what executives have called challenging market conditions in recent months. The company, and the housing industry at large, said it had seen moderating demand and an uptick in buyers canceling orders, a trend it attributed to increasing interest rates and economic uncertainty.
D.R. Horton reported that it closed deals on 19,664 homes over its second fiscal quarter for 2023, which ended on March 31. That is a 1% decrease in closings when compared to the same quarter the previous fiscal year, when the company reported 19,828 home closings. Nevertheless, the builder has seen a resurgence of demand compared with the 38% plunge in home sales in the first fiscal quarter, as buyers seek affordable houses.
“The spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter,” said David Auld, president and CEO of D.R. Horton, in the earnings call. “Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions.
“Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable,” Auld added. He also noted that D.R. Horton closed on its millionth home over the second quarter, which, he said, is a first for any homebuilder.
The Arlington, Texas-based builder’s cancellation rate, which spiked in recent quarters, has improved to 18% in the second fiscal quarter. This was a big drop from the prior quarter’s cancellation rate of 27% but remains slightly elevated compared to the prior year’s second fiscal quarter of 16%.
Paul Romanowski, the company’s executive vice president and co-chief operating officer, said D.R. Horton has continued offering incentives and reducing prices, as well as the size of houses, to offer affordable options to buyers.
“We expect to continue offering a similar level of incentives throughout 2023 and we are seeing indications that our average sales price and incentive levels are beginning to stabilize,” he said, adding that the average cost of a D.R. Horton home in the quarter was $372,900, which is down 7% from the same period the prior year.
D.R. Horton earned $942.2 million in the second fiscal quarter, which was a 34% drop compared with $1.4 billion earned in the same period the prior year. The company’s homebuilding revenue was consistent with last year, totaling about $7.5 billion.
The company’s rental business generated $224 million in revenue in the quarter with the sale of 721 single-family rental homes, which brought in pre-tax income of $35 million. In all, its rental property inventory totaled $3.3 billion, including about $2.1 billion of single-family rental properties and $1.2 billion of apartment properties.
Mike Murray, an executive vice president and co-chief operating officer at the firm, said he expects rental operations to generate “significant increases” in revenues and profits this year as the platform matures and expands across more markets.
In looking at the year ahead, executives at D.R. Horton expect continued uncertainty surrounding mortgage rates, capital markets and general economic conditions. For the full year ahead, executives tell investors they expect to close between 77,000 and 80,000 homes, and between 4,000 and 5,000 rental homes and apartments.
Bill Wheat, D.R. Horton’s executive vice president and chief financial officer, told analysts he’s keeping an eye on the headlines tied to the banking industry, but has yet to see a significant impact on the company’s business.
“We have been watching that market very closely, having a lot of conversations with our banking relationships, but, at the moment, it’s still business as usual,” Wheat told analysts. “That’s something we’ll continue to monitor. We just renewed our mortgage warehouse facility this quarter, and we kept basically the same bank group in place. The market is still functioning and working as normal, but, if we see further distress in the market, we’ll be prepared to adjust.”