Nation’s Largest Homebuilder To Focus on Rental Business as Some Buyers Exit Market
The rapid rise in interest rates is pushing the nation’s largest homebuilder to scale back house sales projections and focus on its growing rental business.
D.R. Horton has lowered the number, and value, of for-sale houses it expects to close on for its fiscal year that ends Sept. 30 as it deals with increased cancellations from would-be buyers and a drop in sales orders.
“The disruptions in the supply chain and tightness in the labor market continue to delay the completion of our homes that are under construction,” said David Auld, CEO and president of Arlington, Texas-based D.R. Horton, during the company’s quarterly earnings call Thursday. “These delays and changes in demand environment led us to reduce our full year closing guidance of fiscal 2022.”
The company’s cancellation rate increased to 24% in its latest quarter compared to 17% during the same time last year, and net sales orders were down 7% to 16,693 houses. Auld said the cancellation rate for the quarter is going up after interest rates rose in June: “Payment shock is a part of it.”
Higher interest rates and inflation reaching 40-year highs is expected by apartment property investors, who have been paying record prices for buildings around the country, to boost the multifamily industry as renters opt to keep renting rather than buy a home with a hefty mortgage payment. The comments by D.R. Horton offers confirmation that consumers are in fact showing signs of steering away from houses to avoid those costs.
Reselling a house in which a sales contract has been canceled takes roughly four to 12 weeks, and D.R. Horton executives told investors they haven’t had a problem reselling to other buyers. The builder’s average price of a home sold in the past year is under $350,000, roughly a $100,000 discount compared to its public rivals, allowing D.R. Horton to continue aggregating market share, Auld said.
“Most people remember 2008, 2009 and 2010, which was the worst market I’ve ever seen with values that deteriorated, which isn’t typical in the history of this country,” Auld said. “I feel good about where we are headed market-wise and the response we are getting as we continue to see housing demand out there.”
The 44-year-old homebuilder, which operates in 105 markets in 33 states, builds homes with prices ranging from $200,000 to over $1 million. The company is the nation’s largest homebuilder by revenue — with more than $27.7 billion in 2021 — and by number of annual closings, which reached nearly 82,000 last year, according to Builder magazine. Auld’s total compensation rose 59% to $30.6 million last year from the prior year as the business grew.
This year, D.R. Horton expects to close on between 83,000 and 85,000 homes, down about 5.6% from its earlier projections.
“Although demand has slowed from the frenzied pace we experienced over the past year, there are still qualified buyers in the market today as household formations continue and inflationary pressures drive rents higher,” said Auld.
D.R. Horton is planning on expanding its multifamily and single‐family rental platforms, which are expected to generate $800 million in revenue for the fiscal year that ends in September. D.R. Horton is also changing the intended use for some of its for-sale home lots into single-family rental projects and plans to continue to do so.
“We certainly have repurposed projects that we originally identified three to four years ago” as for-sale that are now “being executed for rent, and that process continues,” said Mike Murray, executive vice president and co-chief operating officer of D.R. Horton, during the earnings call.
D.R. Horton’s rental property inventory was valued at $2 billion as of June 30, up from $760 million during the same time last year. The homebuilder only entered the single-family rental business last year with a neighborhood in Charlotte, North Carolina. D.R. Horton builds rental houses to sell to investors, instead of building them and serving as the landlord as other companies are doing.
“We always thought build-to-rent is a great way to more rapidly monetize land positions without cannibalizing for-sale business because it’s a different user of that real estate and different owner of that real estate, so it brings other capital pools to bear,” Murray told investors.
During the third quarter, D.R. Horton sold a 298-unit apartment property for $69.3 million and a single-family rental development totaling 84 homes for $39.5 million. Additional details of the properties, including addresses, were not immediately available.
In its rental portfolio, D.R. Horton has 6,110 apartment units, the majority of which are under construction, spanning 21 properties totaling nearly $700 million in value. For the builder’s single-family rental business, D.R. Horton has 7,710 homes and finished lots in 115 single-family rental developments with a value of $1.3 billion. Construction on 2,390 of the rental homes is finished.
“We continue to expect our rental operations to generate $800 million in revenues for fiscal 2022 and plan to continue growing our rental inventories, which we expect to be a significant contributor to revenue, profit and returns in future years,” said Murray.