D.R. Horton and other homebuilders’ outlook for 2014 and beyond
D.R. Horton noticed a good start to the spring selling season
On its conference call, the company noted that traffic in January increased. This is a good sign for the spring selling season, which more or less unofficially kicks off around now. Management mentioned that it seems like the season is starting early for D.R. Horton, which is another beneficial sign.
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Donald R. Horton, chairman of the board, characterized the quarter as follows:
- “Our fiscal 2014 is off to a great start. First quarter pre-tax income increased 76% to $189.7 million and our pre-tax income margin improved 290 basis points to 11.4% The dollar value of our homes sold, closed and in backlog all increased by double-digit percentages. Our average sales price increased 10% to $275,600, reflecting pricing power across most of our markets and increased demand from move-up buyers.”
The macro picture for the builders looks good
People forget that a housing bust is getting pretty long in the tooth. The housing market peaked in 2006, which was eight years ago. A lot of excesses from the bubble have been worked off, and in many ways, we’ve seen the opposite problem—a shortage of existing and new inventories. Part of this trend has been due to foreclosure laws, and part has been due to caution on the part of the builders.
Take a look at the above chart. It shows housing starts going back to 1959. You can see that housing starts have averaged about 1.5 million units going back that far. Since the bust, we’ve been about half that number. That’s a lot of under-building over the past six years. The only thing that has kept even a semblance of normal supply and demand has been the low household formation numbers that have accompanied the Great Recession. The important thing to keep in mind is that those numbers weren’t due to fertility rates 25 years ago. They were due to a lousy economy. This means there’s tremendous pent-up demand that will unleash once the economic recovery filters down to the young. Homebuilders with lots of exposure to the first-time homebuyer—like D.R. Horton (DHI) and PulteGroup (PHM)—will benefit from this demand the most.