The nation's largest homebuilder is walking away from some of its land deals as the rapid rise in interest rates and upended lending markets leads to homeowners canceling or delaying sales even with the builder adding incentives.
D.R. Horton, which operates in 105 markets in 33 states, said its cancellation rate for new homes spiked to 32% in the quarter ended Sept. 30, up from 19% in the same quarter last year. Net sales orders for the quarter slid 15% to 13,582 homes and were down 10% in value compared to last year. About 730 for-sale home closings in South Carolina and Florida were delayed in the fourth quarter from Hurricane Ian, executives told investors.
The decline in demand for new homes is expected to boost apartment demand as renters opt to keep renting rather than buy a home with a hefty mortgage payment.
Still, D.R. Horton reported a record-breaking fiscal year of production with 83,518 homes completed in its homebuilding and single-family rental operations, making the Arlington, Texas-based company the largest U.S. homebuilder for the 21st consecutive year, said Donald Horton, chairman of D.R. Horton, in a statement. Sales for D.R. Horton's for-sale home business, with houses priced from $200,000 to over $1 million, decreased 6% to 76,137 in the fiscal year compared to last year.
"Beginning in June and continuing through today, we have seen a moderation in housing demand caused by significant increases in mortgage interest rates and general economic uncertainty," Horton said. "While these pressures may persist for some time, the supply of homes at affordable price points remains limited, and demographics supporting housing demand remain favorable."
Higher mortgage rates prompted D.R. Horton to offer more incentives to potential buyers during the fourth quarter and to start building smaller homes at more affordable prices, which it expects to keep doing over the next six to eight months, executives said.
The homebuilder is also set to capitalize on the rental market with its for-rent business, launched in 2021, that includes 7,400 single-family rental houses and 5,810 apartment units under construction as of Sept. 30. D.R. Horton builds rental houses to sell to investors, instead of building them and serving as the landlord as other companies are doing.
Hurricane Delays Sales
The firm's rental business generated $510.2 million of revenue for the fiscal year, but took a pre-tax loss in the most recent quarter of $13.1 million. This part of the builder's business was also disrupted by Hurricane Ian, which delayed the sale of 562 single-family rental houses in Florida during the quarter, Mike Murray, executive vice president and co-chief operating officer of D.R. Horton, told investors during an earnings call Wednesday morning.
"The changes to the capital markets also impacted the timing of some of our buyer's financing," Murray said, adding he expects a "significant increase in revenues and profits in fiscal 2023 as the platform expands in new markets next year."
In the quarter, D.R. Horton sold 96 single-family rental houses for a total of $21.1 million. For the fiscal year, D.R. Horton sold a total of 774 single-family-rental houses for $313.8 million — roughly tripling this part of the business from the prior fiscal year.
On the apartment side of D.R. Horton's rental business, the company sold 775 multifamily units for $195.5 million during the fiscal year for about $252,258 per unit, higher than its $200,104 per unit it recorded for the previous fiscal year. D.R. Horton had $897.2 million in apartment inventory on its balance sheet as of Sept. 30, with 300 completed units and 5,810 units in active construction.
Construction timelines increased by a week in the fourth quarter because of lingering supply chain issues, which D.R. Horton executives expect to improve during this fiscal year. The slowing velocity of deals are expected to allow the supply chain and materials makers to get "their feet underneath them" and, if the industry remains disciplined, get back to selling homes in the future, said David Auld, CEO and president of D.R. Horton, on the earnings call.
"If we see a stabilization of interest rates, I feel very optimistic about what we can do this year," Auld said. "If we continue to see 100 basis point interest rate increases quarter to quarter to quarter, I think it will be a very challenging year."
The builder has been managing its investments in its for-sale business to meet its needs and in some cases that has led the company to walk away from land deals even as it has spent millions of dollars on due diligence because of the uncertainty in the economy. At the end of September, D.R. Horton had 573,000 home lots with 23% of them owned and 77% controlled through land purchase contracts.
"We've always had a very disciplined approach with every economic decision," Auld told investors. "It's all about creating optionality and efficiency of capital. That has been our program and will continue to be our program moving forward."