D.R. Horton’s gross margins
Like most of the other builders, D.R. Horton (DHI) has been reporting lower gross margins due to sticker shock. Home prices have been increasing, but wage growth has been stagnant. Historically, home price appreciation has been related to income growth. In fact, it wasn’t until 2000 when the median home price-to-median income ratio broke out of its historic 3.2x–3.6x range.
D.R. Horton’s gross margins held steady at 19.9% on a sequential basis in 2Q16. On a year-over-year basis, they were up 0.2%. D.R. Horton had relatively stable gross margins over the past year. Its margins have been more stable than its competitors.
It’s important to note that as D.R. Horton’s Express Homes brand rolls out, the gross margins are expected to fall due to product mix. Express Homes’ ASP (average selling price) is around $199,000. The gross margins are lower. On a sequential basis, Express Homes’ ASP rose from $185,000 to $199,000.
“Sticks and bricks,” or material costs, have been increasing more or less in line with the ASP on a per-square-foot basis. Lower energy prices are certainly helping here. While lower oil prices help with building products like asphalt shingles, lumber has been steady.
Finally, we saw wage inflation in skilled trades. Labor shortages have been an issue for a few years. This should continue to be a problem.
Home price appreciation is moderating, costs are rising, and incentives are returning to normal levels. Other builders like Lennar (LEN) reported decreasing gross margins as buyers experience sticker shock and refuse to pay up. On the other hand, PulteGroup’s (PHM) gross margins have been flat. The changes in margins have varied across builders, but the general trend is downward.
Prices and costs
Builders benefited from a dearth of inventory over the last few years. The overbuilding of the bubble years has been corrected. Lately, builders have been underbuilding. This supported home prices.
Another reason for the shift has been the move to lower price points. Now, the first-time homebuyer accounts for about 40% of D.R. Horton’s sales. This is nearly in line with historical norms. It’s much higher than the rest of the industry, which is closer to 30%. 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)—outperformed 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).