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Notebook and Pen


What do you do if you have homes to sell, but many buyers can't afford them? Rent Them!

DR Horton Turns to Incentives for House Sales, Cutting Into Profits

D.R. Horton is upping its forecast for how many homes it plans to sell this fiscal year. (iStock)

By Candace Carlisle CoStar News July 26, 2023 | 5:45 A.M.

DR Horton which is one of the largest home builders in the country is in the process of converting their "Built for sale" homes into "Built to Rent" homes. This is a smart move on their part as it's not due to a lack of demand that buyers aren't purchasing, it's due to a lack of affordability because of very high interest rates.

They know that it's just a matter of time before the rates fall, which will increase affordability, and allow them to capture the price appreciation between now and then! All this to say, Real Estate is only going to get more expensive as time goes on

Be sure to watch our 2023 Half-time report, being released soon!

Biggest US Homebuilder Expands Rental Business Amid Higher Interest Rates

The nation's largest homebuilder is betting on its rental business as higher interest rates boost mortgage payments, making houses a harder sell.

D.R. Horton, which entered the rental business that includes single-family rentals and apartment units in 2021, expects to deliver on 6,500 to 7,000 rental units this fiscal year, up from 1,549 rentals in fiscal 2022.

It expects its rental margins overall to be higher than the company's homebuilding margins, which were lower in the third quarter because of incentives needed to lure buyers in the face of higher finance payments. But the Arlington, Texas-based company is still bullish on its homebuilding sector because of the U.S. housing shortage and a lack of existing homes hitting the secondary market leading to bigger profits for builders.

Other major homebuilders are also confident in their homebuilding operations. Lennar Corp., the second-largest U.S. homebuilder by volume, said in its latest earnings report that customers have adjusted and accepted high interest rates, bringing back strong demand for housing that had been curtailed by sticker shock and affordability challenges.

D.R. Horton is upping its forecast for how many houses for sale it plans to complete this fiscal year as well as its estimated revenue. D.R. Horton plans to close on between 82,800 and 83,300 houses in fiscal 2023 with consolidated revenue upward of more than $35 billion, executives said. Previously, D.R. Horton said it expected to deliver 80,000 homes or less with consolidated revenue only reaching $33 billion this year.

D.R. Horton closed on nearly 83,000 homes in 2022, making it the largest U.S. homebuilder by volume, a title it has claimed since 2002, according to the company.

"We are at an extremely interesting time with interest rates nearly doubling and home prices outpacing wage growth," Brian Yarbrough, a senior analyst at Edward Jones, who tracks D.R. Horton and other consumer-facing companies, told CoStar News. "But we are still seeing strong demand. There's no existing homes for sale with 90% of homeowners locked in at an interest rate that is 4% or below. Why would they want to get out of that loan to go to a 7% loan today? That lack of existing homes is probably one of the biggest drivers behind the demand for new homes today."

That housing shortage could also be a boon to D.R. Horton's expanding rental business. In the third quarter, the firm generated $667.1 million of revenue from the sale of 1,754 single-family rentals and 230 apartment units. As of June 30, D.R. Horton's rental property inventory totaled $3.3 billion, which includes $1.9 billion of single-family rental properties and $1.4 billion of apartments. D.R. Horton did not return a media request from CoStar News seeking details about its rental dispositions.

Lower Prices

D.R. Horton closed on 22,985 homes during its fiscal third quarter, up 8% compared to the same period the prior year when it closed on 21,308 homes. The builder's average closing price for the quarter was $378,600, which was flat sequentially and down 3% from the prior year's quarter.

Likewise, Miami-based Lennar's average sales price of a home it closed on in its latest quarter was $449,000, down about 7% from $483,000 in the same quarter last year.

Despite continued high mortgage rates and inflationary pressures, D.R. Horton President and CEO David Auld told investors the firm's net sales orders increased 37% from the prior-year quarter as the supply of both new home and existing homes at affordable price points remained limited as housing demand stays robust.

"We're going to have a lot more houses to sell this year," Auld said.

D.R. Horton, which was the second-largest publicly traded homebuilder by revenue on Fortune's 2023 list of U.S. companies, has strengthened its balance sheet to help it take advantage of what Auld calls "disruptions in the market" that allows it to selectively buy companies. D.R. Horton's recent $100 million acquisition of privately held Truland Homes helped bolster its business along the Gulf Coast and grow market share in Alabama and the Florida panhandle.

Yarbrough with Edward Jones told CoStar News he expects D.R. Horton to announce a few more acquisitions like the Truland Homes deal before year's end.

Some private homebuilders are struggling in the business because of private equity firms and banks increasing the cost of capital, Auld said. D.R. Horton is talking to some private companies but Auld said his team is being selective about who they invite into the firm's so-called family. For example, Auld said he knew Nathan Cox, who led Truland Homes in the Gulf Coast, for 15 years prior to the acquisition.

That expected consolidation in the market would give D.R. Horton the ability to "create a level of affordability no one else can achieve," Auld said.

Private builders aren't alone with financial struggles as buyers reach the limits of what they can afford, Yarbrough said. For some buyers with student debt payments resuming this fall and the pandemic-built savings whittled away as consumer patterns return to normal, the higher interest rates — coupled with the higher average cost of a home — might be too much in the future, Yarbrough said, adding he expects demand for homes to slow next year.

"I think we're going to start to see a slower demand, but for the longer term the shortage of homes is going to continue to be a tailwind for the industry," Yarbrough said.


Content by Vidona Residential Columbia Realtors

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