Despite high interest rates and economic headwinds, resale inventory is finally starting to grow. While this is a positive sign for the overall real estate market, some investors are wondering if more resale listings could dampen demand for new home construction.
If last month’s earnings call is any indication, the nation’s largest homebuilder isn’t too concerned. D.R. Horton executives navigated several questions from analysts pertaining to how the firm plans to navigate a growing inventory or resale listings and current market headwinds.
To put it into perspective, resale inventory in March 2024 was 24% higher than in March 2023. However, it was still 37.7% lower than March 2019. D.R. Horton CEO Paul Romanowski said housing inventory would have to jump significantly before it poses any threat to the homebuilder’s sales.
Romanowski said that the majority of new inventory is overpriced or needs significant work and investment. The market is still experiencing a gap when it comes to quality homes at affordable price points, which is precisely where D.R. Horton typically competes.
“We expect it’s going to take significantly more homes to come on before we see it be a lot of impact on our ability to sell,” Romanowski said.
Even when inventory does reach pre-pandemic levels, Romanowski remains confident about the firm’s position in the market. As a spec builder, the company has been competing with both new home construction and resale for decades. Additionally, D.R. Horton’s quality homes, strong incentive packages, and great closing cost basis will continue to drive sales and differentiate the homebuilder from others in the market.
While resale inventory is up across most of the United States, Florida has especially seen high growth. Inventory in the Sunshine State was up 57% year-over-year, and news of rising insurance rates is also creating market headwinds.
While Florida is one of D.R. Horton’s largest markets, Romanowski said results in the state have been strong, and the firm should be able to navigate market challenges. He also pointed out most of D.R. Horton’s new construction locations are well off the coast, and brand-new homes offer a higher degree of stability when it comes to high interest rates.
“We feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula,” Romanowski said.
Over the past year, D.R. Horton has been able to leverage mortgage buydowns as a tool to drive higher sales in a higher mortgage rate environment. The tactic has been highly effective. Despite the costly investment, the firm posted a gross margin of 241% in Q2 2024, which is still significantly above pre-pandemic levels.
During April’s earnings call, D.R. Horton CFO Bill Wheat was asked if the firm plans to push more funds toward buydowns if rates continue to rise.
“We’re going to continue to manage pace and margins to the returns that we want,” Wheat said. “And if we need to press a little more on the incentives to keep that pace consistent, we’ll do so.”
Wheat said if rates go to the 8% range, he anticipated more challenges when it comes to getting buyers qualified and the firm may consider incentive increases to keep pace.
The potential for growth in investor capital could also lift sales in the coming months. While institutional capital has been hard to come by for the last couple of years, D.R. Horton COO Mike Murray said the firm has seen a small uptick in interest and the number of investors in the market today. If and when interest rates begin to fall, it’s likely additional capital will begin to flow.
While D.R. Horton and other homebuilders have seen higher sales, leadership made it clear on April’s earnings call that they’re not concerned about rising inventory, higher insurance rates, or a lack of investor activity. With a strong business model and long-term strategy, the firm should stay competitive for years to come.
