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Why D.R. Horton’s Focus on Homes Inventory Bodes Well

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Significant investment in land

D.R. Horton significantly increased its investments in acquisition and development of land and lots in fiscal 2012, 2013, and 2014, to expand its operations as market conditions improved and land and lots were available at comparatively lower rates during that period.

In 2013, the company invested $2 billion on land and $640 million on development. In 2012, land and lot investment was $1.1 billion, while development activities saw an investment of $300 million. In 2014, the investment on land and development was $2.3 billion and $900 million, respectively. This pales in comparison to the over $5 billion the company used to spend annually during the heyday of the housing boom.

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Focus shifted from land to housing inventories

D.R. Horton (DHI) slowed the growth of its land and lot inventories in 2014 and increased housing inventories to garner a larger share of new home demand and generate higher returns on land investments. The inventories of finished homes rose from $2.5 billion in 2013 to $3.54 billion in 2014, up by 41.6%. At the same time, land and lot inventories saw a lower growth of 12.4% in 2014 to $4.16 billion.

As seen from the chart above, homes inventory rose gradually from 9,500 in 2010 to 20,600 in 2014. At the end of 1Q15, homes inventory further rose to 21,300. Rising inventory level is an industry-wide phenomenon as other homebuilders like Lennar (LEN) and Pulte Group (PHM) are looking to ramp up homes inventory. Existing home inventory increased by 3.15% in May to 2.29 million over the previous month.

Investors looking for diversification in the homebuilding sector can consider ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB).

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