D.R. Horton’s gross margins dip
Like most of the other builders, D.R. Horton (DHI) has been reporting lower gross margins. This has been due to sticker shock. Home prices have been increasing, but wage growth has been stagnant. Historically, home price appreciation has correlated tightly with income growth. In fact, it wasn’t until 2000 when the ratio of median home price to median income broke out of its historical 3.2x–3.6x range.
Companywide gross margins increased sequentially to 19.9% in the third quarter of 2015 from 19.7% in the second quarter of 2015. However, they fell on an annual basis from 20.7% in the third quarter of 2014. The company is guiding for 2015 gross margins to be in the range of 19.5%–20%.
Note that as D.R. Horton’s Express Homes brand rolls out, gross margins are expected to fall due to product mix. The Express Homes average selling price is around $188,000, and gross margins are lower. ASPs (average selling prices) did increase at Express from 179,000 to 188,000.
“Sticks and bricks,” or materials costs, have been increasing more or less in line with ASPs on a per-square-foot basis. Lower energy prices are certainly helping here.
Finally, we’ve been seeing wage inflation in skilled trades. While lower oil prices certainly help building products like asphalt shingles, lumber has been steady. Labor shortages have been an issue for a few years and should continue to be a problem.
Home price appreciation is moderating, costs are rising, and incentives are returning to normal levels. Other builders such as Lennar Corporation (LEN) have reported decreasing gross margins as buyers experience sticker shock and refuse to continue to pay up. On the other hand, PulteGroup’s (PHM) gross margins have been flattish. So changes in margins have been varying across builders, but the general trend is down.
Prices and costs
Builders have benefited from a dearth of inventory over the last few years. The overbuilding of the bubble years has been corrected, and lately builders have been underbuilding. This has helped support home prices.
Another reason for the shift has been the move to lower price points. The first-time homebuyer now accounts for 40% of D.R. Horton’s sales, which is about in line with historical norms. Starter homes have lower margins than big McMansions. For the past several years, the luxury end of the market—think builders like Toll Brothers (TOL)—was outperforming the lower price points. That said, D.R. Horton has been happy with the rollout of its own luxury brand, Emerald Homes.
Investors who would like general exposure to the homebuilding sector can consider the SPDR S&P Homebuilders ETF (XHB).