Modest rise in average selling price
As mentioned in the previous article, D.R. Horton (DHI) delivered 28,670 homes in fiscal 2014 at an average sales price of $272,200. The average selling price in fiscal 2014 was up 9% from the $249,400 average in 2013.
The company experienced moderation in the level of home price increases during fiscal 2014. This shows that though the average selling price is increasing, it has its limits, and homebuilders must balance pricing power with demand. Excessive rises in pricing may not yield expected returns.
Though the average sales price of the company has seen sustained increase, it is still on the lower band of the price point as compared to its other competitors like Toll Brothers (TOL) and NVR (NVR), who provide luxury homes to their customers. Toll Brothers (TOL), for example, has much lower deliveries of 5,397 in fiscal 2014, but also has a much higher average price of $725,000.
D.R. Horton’s strategy to maintain its gross margin is to focus on delivering homes at the middle band of the price range while acquiring a large number of customers. Other major builders such as Pulte Group (PHM), Lennar (LEN), and KB Homes (KBH) follow the same strategy.
Pricing power differs across regions
D.R. Horton’s average selling price was the highest in the West region at $425,800, followed by the Midwest region at $359,900. In general, the company was able to garner higher average selling prices in areas with lower deliveries such as the West and Midwest. The Southwest region is an exception to this trend, as it has lower deliveries along with the lowest average selling price at $211,600.
Investors who are interested in trading the sector as a whole should look at the SPDR S&P Homebuilders ETF (XHB).