The National Association of Homebuilders (NAHB) released a study that concludes that 63 million households cannot afford a home that costs more than $250,000. Given that there are roughly 129 million households in the US to begin with, that is an eye-popping statistic. D.R. Horton (NYSE:DHI) is one of the few builders out there (LGI Homes is the other) that focus on building low-cost homes for entry level buyers, which is where the demand is most acute.
What are the most common price points currently?
Today, $250,000 is at the lower end of the range of price points out there. Based on December data, the Census Bureau reported the median sales price of a new home was $331,400. The average sales price was quite a bit higher, at $384,000. The census report also breaks down the production into price buckets. 90% of all new homes in December cost more than $200,000, and 57% cost more than $300,000. The National Association of Realtors (NAR) estimated the median home price to be $274,500 in December. This number includes new and existing homes, so it is lower than the census data, which looks only at new homes.
Why is supply so constrained?
While many young adults are burdened by student loan debt that can affect the ability to afford a house, the lack of homes at the lower price points seems to indicate something is wrong with builder mix. Affordability should be easier, given that mortgage rates are dramatically lower than they were 10 or 20 years ago. Ultimately the lack of lower-priced homes comes down to a supply issue.
In the immediate aftermath of the financial crisis, much of the foreclosed inventory was taken up by professional investors, like American Homes 4 Rent, which rented them out. This pulled supply off the market, which stabilized prices in the near term and created the circumstances for bidding wars recently. Labor shortages have bedeviled the construction industry as well, along with regulatory issues. As a result, housing starts have been well below historical averages for over a decade.
Why D.R. Horton is best positioned to address the shortage
D.R Horton has some of the lowest average selling prices of the publicly traded homebuilders. While diversified across all segments, the average selling price in the last quarter was $300,900. In fact, 42% of its sales were below that $250,000 price point. In comparison, Lennar's average selling price was $400,000, Pulte's was $427,000, and KB Home's was $380,000. While pretty much every builder is now rolling out some sort of first-time offering, "entry-level" can mean different things to different builders. For example, Toll is targeting the older, more affluent first-time buyer with homes at price points around $500,000, so it isn't directly competing with D.R. Horton. DHI has been one of the few builders that concentrated on entry-level and affordable housing throughout the entire cycle.
Valuation and the macro view
The company reported impressive results for the first quarter of 2020, with a a 53% increase in earnings per share. Orders rose 19% in units and 22% in dollar value. D.R. Horton also has some of the highest gross margins in the business, with first quarter margins up 100 basis points YOY, and guidance for the second quarter to be about the same. That is impressive for the seasonally slow period. With the rebound in housing starts, it looks like 2020 might be the year when building finally breaks out of the post-bubble vortex and rallies.
Homebuilding is a highly cyclical business, and builder P/E ratios will collapse at the top of the cycle and increase during at the bottom. D.R. Horton is trading at 11.8 times estimated 2020 earnings, while we are still early in the homebuilding cycle. The post-recession building boom, which usually leads the economy into expansion never materialized this time around. Despite January's blowout housing starts number of 1.57 million, that number is close to longer-term historical averages. There was almost a decade of slower housing starts leading up to this point, so there is tremendous pent-up demand, particularly for the entry-level buyer. With rates falling, D.R. Horton is a value stock with some growth upside, and a focus on the right segment of the market.