D.R. Horton To Build Smaller Homes To Help Meet Demand for More Affordable Housing

CoStar News

January 23, 2024 | 5:04 P.M.

The nation’s largest homebuilder is raising its sales expectations as it plans to build and sell more houses priced to appeal to first-time buyers squeezed by higher finance costs.

D.R. Horton anticipates selling as many as 90,000 single-family houses this year, about 1,000 more than earlier estimates. Meanwhile, the Arlington, Texas-based company that builds and sells more houses than any rival plans to keep offering incentives such as rate buy-downs to entice buyers. D.R. Horton expects revenue of $36 billion to $37.3 billion in fiscal 2024 ending Sept. 30, about $300 million more than its previous estimate.

The move shows how the housebuilder is trying to lure more apartment dwellers to embark on homeownership after a record pace of interest rate increases through the beginning of last year made mortgages more expensive.

Still, D.R. Horton is not disclosing next quarter's expectations for its growing rental operations, a business that includes built-to-rent houses and multifamily projects, because of "interest rate volatility and capital market fluctuations," CEO Paul Romanowski told investors Tuesday during an earnings call.

D.R. Horton's business plan includes building smaller houses to help meet the demand for more lower-cost housing as there is an estimated shortage of 7.3 million affordable homes in the United States, according to the National Low Income Housing Coalition. The average sales price of a home sold across the nation in the third quarter was $513,400, according to the Federal Reserve Bank of St. Louis.

In fiscal 2023, D.R. Horton sold 82,917 single-family houses, with 68% being sold for under $400,000. In the first quarter of fiscal 2024, the average cost of a D.R. Horton house sold at $375,800. The company used more incentives to lure buyers during its latest quarter, with the key being rate buy-downs to help them make mortgage payments in the short term, executives told investors.

D.R. Horton's profit slid 1% to $947.4 million in the first quarter of its 2024 fiscal year that ended Dec. 31 from the same quarter the prior year.

Even with the volatility in capital markets and the company's decline in net income, Romanowski said he's "encouraged by early trends in January," and "excited for what the spring selling season will hold" in the second quarter.

Affordable Homes

D.R. Horton Chairman Donald Horton said even as inflation and mortgage interest rates remain elevated, the company's net sales orders increased 35% from the prior year's quarter, showing there's a demand for more affordable homes from first-time homebuyers — a part of the market to which the company remains committed.

"We are well-positioned to meet changing market conditions with our affordable product offerings and flexible lot supply and focused on turning our inventory to maximize returns and capital efficiency in each of our communities," Horton said in a statement.

In the first quarter, D.R. Horton closed on 19,340 homes, which were valued at $7.3 billion. Both metrics increased from the same quarter the prior year, in which 17,340 were sold in the first quarter of fiscal 2023 in deals valued at $6.7 billion.

The company's cancellation rate for the first quarter also improved, declining from 27% a year ago to 19% in the quarter kicking off fiscal 2024.

Capital market conditions weighed on D.R. Horton's growing rental business — limiting its ability to sell properties — during the first quarter.

In the first quarter of fiscal 2024, D.R. Horton sold 379 single-family rental homes for $116.1 million. The company also sold a 300-unit multifamily property for $79.2 million. Additional details of these transactions were not immediately available.

As of Dec. 31, D.R. Horton had a combined single-family rental and multifamily rental inventory of about $3 billion, with 5,820 single-family rental houses and 10,200 apartment units in various stages of construction.

"Certainly, we have seen that with the change in the capital markets, that demand environment became much choppier last year," said Michael Murray, executive vice president and chief operating officer of D.R. Horton. "We still had institutional buyers that were anxious to get the product we were delivering to the market.

"For us, it's a strategy to help us de-risk land positions and more rapidly monetize our land portfolio," he added. "We are still seeing good demand for the product, good demand on the rentals and the lease-ups when we're taking the stabilization process on and continue to expect that to become a growing part of our business."