CEO of America's largest homebuilder says housing inventory would have to 'significantly' jump before it'd impact their ability to sell

Earlier today, ResiClub PRO members got a home price update for over 800 metros and 3,000 counties.

On Thursday's earnings call, an analyst asked D.R. Horton CEO Paul Romanowski how rising active inventory levels, which in March 2024 were +24% higher than March 2023 although still -37.7% below March 2019, are impacting the nation's largest homebuilder.

Romanowski responded saying that: “Inventories, we have certainly seen more inventory in the market today on the resale side than we have in the past. Months of supply has crept up slowly across most of our markets, but [the] majority of what we see coming to the market is still maybe either overpriced or has significant need and work and very minimal in the affordable price points where we tend to compete. So 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. But we've competed in that market forever. We have been a spec builder. We do that to compete in the new-home market as much as we do against the resale market. Feel very good about our product and positioning against the homes that come to market as resale available when they do. And we think we have a great package of incentives, warranty and closing cost basis to compete against that inventory when it does come on and it will at some point in the future.”

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Another analyst asked Romanowski specifically about rising active inventory in Florida, which is up +57% on a year-over-year basis.

Romanowski responded saying: "Florida still feels good to us. There certainly has been a lot of news tied to the rise in insurance rates and for most of where we sell our homes are off the coast and building new construction allows for some stability in those insurance rates. So haven't seen a significant increase for the homes in the communities where we sell as you may see reported along the coastal and high wind zones. Still seeing good migration and good job growth throughout the Florida market. So we feel pretty good about the Florida market and especially about our positioning at the more affordable price points across the Florida Peninsula.”

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Bill Wheat, CFO of D.R. Horton, was asked during the call whether the recent increase in mortgage rates would lead the homebuilder, ranked No. 120 on the Fortune 500, to allocate more funds towards buydowns in the current quarter.

Wheat responded saying: “We move our [buydown] rates along with the market. And so really it becomes a question of absorption and pace. We're going to continue to manage pace and margin to the returns that we want. And if we need to press a little more on the incentives to keep that pace consistent, we'll do so. But we move our rates along with the market. So it doesn't necessarily mean we're seeing significant costs. In the level of those buydowns, it really just starts to stress the buyer when they climb up into the 7% and if they go to the 8% range, then we'll see a little more challenge in getting buyers qualified. And if it goes that high, I would expect to see our incentives increase to keep our pace.”

Despite continuing to offer costly incentives like mortgage rate buydowns, D.R. Horton notched a gross margin of 241.% in fiscal Q2 2024, according to S&P Global. While that represents some margin compression since Q2 2022 (30.7%), it’s still above the pre-pandemic level of Q2 2019 (19.8%).

“We [D.R. Horton] feel like it's sort of—I won't say business as usual in this crazy volatile world we're in. But right now, we feel pretty steady, pretty good about where things are,” Romanowski, D.R. Horton’s CEO, said on the call.

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Two years ago, institutional capital slowed its deployment into the housing market as rates spiked. An analyst asked D.R. Horton COO Mike Murray if they are observing a resurgence in investor purchases from D.R. Horton.

Murray responded: “I would say we've seen a little bit of a tick up in terms of interest and the number of investors out there in the market. They're still being cautious and rates are where they are and cap rates acting in kind. But I would say that just across the board, we've seen a bit of a tick up and have more interested parties in those assets that we have out for sale today.”

On Thursday, economists at Freddie Mac issued a new outlook. They revised down their outlook for U.S. home prices:

2024: +0.5% (previously +2.8%)

2025: +0.5% (previously +2.0%)