D.R. Horton’s gross margins keep improving with a lack of inventory



D.R. Horton mentioned the first-time homebuyer is still struggling

While D.R. Horton remains optimistic about the spring selling season (which gets underway very soon), it noticed more strength in the move-up buyer than the first-time homebuyer. The first-time homebuyer and the first move-up buyer are D.R. Horton’s bread-and-butter customers. That said, the company is expanding into some of the higher price points. As builders like Toll Brothers (TOL) have seen, the luxury buyer is doing extremely well these days, as asset prices soar. The first-time homebuyer, on the other hand, is competing with professional investors, is often shut out of the job market, has a high level of student loan debt, and has difficulty getting a mortgage.

DHI Gross Margins

Gross margins continue to rise

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Company-wide gross margins increased to 23.9% in the first quarter, from 23.7% in the third quarter of 2013 and 21.4% in the first quarter of 2013. The company was asked on its conference call whether gross margins can continue to increase, and management said that they expect to at least maintain these margins going forward if not to increase them slightly.

Prices and costs

The dearth of inventory is helping pretty much all of the builders. Low inventory on existing homes (due to high professional investor demand and foreclosure laws in some states that require judges sign off on foreclosures) has kept the feared tidal wave of distressed homes from hitting the market. As a result, pricing has been relatively firm, as evidenced by recent housing indices, which are showing double-digit year-over-year increases. These increases are reflected in higher average selling prices.

Costs have generally been increasing, although at a slower rate than the company has been able to raise prices. Lumber demand (and pricing) tends to be seasonal, and the company expects to pay more for lumber going into the spring selling season. Drywall prices are also increasing. In some markets, labor costs are increasing—especially for skilled construction workers.


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