Please ensure Javascript is enabled for purposes of website accessibility

America's Largest Homebuilder Forecasts a Strong Housing Market Over the Next 5 Years

By Brent Nyitray, CFA - Aug 4, 2020 at 10:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Census Bureau confirms what the builders are seeing.

So far, the story of the past few months for pretty much every builder has been a massive jump in demand driven by the COVID-19 crisis. We have recently heard from industry heavyweights Lennar and PulteGroup. America's biggest homebuilder, D.R. Horton (DHI 1.30%), recently reported and the common thread is a massive uptick in demand and orders. Interestingly the data points were supported by recent economic data out of the U.S. government. This means that D.R. Horton should see a continuation of its recent growth for the forseeable future. 

Massive jump in the homeownership rate

The United States Census Bureau just reported that the homeownership rate in the second quarter of 2020 increased to 67.9%, compared to 64.1% in the first quarter of 2020. This represents a sea change in the attitude of homebuyers. It is certainly possible that complications from COVID-19 may have created measurement errors that will be revised away later. After all, a 3.8 percentage point jump is way out of line with historical quarterly changes. The trend of increasing homeownership rates is unmistakable, though. Demand is accelerating for single-family homes and we already have a massive inventory shortage.  

US Home Ownership Rate Chart

US Home Ownership Rate data by YCharts

Orders and demographics

In the aftermath of the 2008-2009 financial crisis, millennials avoided home-buying, preferring to live in urban, walkable neighborhoods. It turns out that this wasn't a wholesale change. The big rush of millennials buying homes was just delayed; it wasn't a change in attitudes about homeownership by a generation that witnessed a housing bust first hand. It seems that each generation over the past 50 years has married later, had kids later, and bought homes later. On D.R. Horton's conference call Wednesday, CEO David Auld discussed his view of the demographic and attitudinal shift that has been influenced by the COVID-19 crisis:

I think that's a trend that was in place before the COVID-19 program and I think it's really tied toward the millennial being a more conservative disciplined buyer of homes than previous generations. They were forming households later, having children later, and I think this pandemic has accelerated that trend. And like ... pent-up demand or pull forward demand or there's just a whole lot of people out there that I think are going to be looking for housing over the next five plus years. 

The company's orders certainly support the idea of increased demand. Orders were up over 50% in May and June, and the company said that July was up 50% year over year as well. A 50% jump in orders for May, June, and July seems to be the common experience across the industry, at least from the builders that have reported already. 

House under construction

Image source: Getty Images.

Plenty of financial firepower to build the business

Pivoting to the financials, D.R. Horton's revenue increased 10% year over year in the third quarter to $5.4 billion. Homes closed increased 10% to 17,642 units. Orders were up 38% to 21,519 units and 35% in dollars to $6.3 billion. Gross margin increased to 21.6%, which was an improvement of 30 basis points compared to the March quarter and 130 basis points from a year ago. Earnings per share rose 37% to $1.72. Cash on hand increased to $1.9 billion and liquidity increased to $3.7 billion. The company has $2.5 billion in homebuilding debt and only $400 million coming due in the next 12 months. 

The company is certainly in a position to ramp up land spend with plenty of liquidity. The company's public but internally controlled subsidiary Forestar (FOR 2.20%) is the land development arm of D.R. Horton and will be heavily involved in the increasing land spend. About 77% of Forestar's land holdings are either under contract to D.R. Horton or subject to the company's right of first offer. 

Despite the overall economic weakness, the homebuilding sector is in a good position, with huge demand and rock-bottom interest rates. The biggest gray cloud (and it isn't much of one) is related to input costs. Skilled construction labor is still scarce, and the cost of lumber has more than doubled since prices fell dramatically in early April.

This could affect gross margins, although demand is so high the company may be able to pass on those added costs to buyers. So far, gross margins are strong, but that will be a concern going forward. D.R. Horton is trading as 12.5 times expected 2020 earnings and is at the beginning of what might be a multi-year housing cycle. With a focus on the entry-level homebuyer, D.R. Horton is well-positioned to benefit from an extended period of homebuilding expansion. 

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
DHI
$79.72 (1.30%) $1.02
Forestar Group Inc. Stock Quote
Forestar Group Inc.
FOR
$13.93 (2.20%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.