Homebuilding giant D.R. Horton plans to add incentives for buyers and sell more houses with smaller floor plans to boost demand.
The Arlington, Texas-based company said the average home size was down 1% in the quarter ended Sept. 30 from a year earlier. That was partly from selling more townhouses, even though single-family homes remain a focus, executives said.
Mortgage rates near and above 7% have stemmed demand. The Federal Reserve cut interest rates by half a percentage point in September, but mortgage rates still have nudged up in recent weeks. The lower rates could motivate homebuyers eventually, analysts said, though demand hasn't responded yet as consumers wonder if borrowing costs could fall further in 2025.
Meanwhile, sales prices of new houses have eased from record highs but remain elevated, particularly for first-time buyers. The median for new homes sold in September was $426,300, virtually the same as in September 2023, according to the U.S. Census Bureau and the Department of Housing and Urban Development. The median means half the homes sold for more and half for less that amount.
Buyers appear less motivated now than they were in recent months, D.R. Horton CEO Paul Romanowski said Tuesday discussing the company's quarterly earnings. While foot traffic was consistent, it was below expectations as consumers struggle with mortgage rate volatility and uncertainty over the presidential election, he noted.
"We just need to continue to drive to affordable price points and affordable monthly payments, and that comes from a lean towards smaller product," he said, adding that the company also will continue targeting move-up buyers as well as baby boomers.
D.R. Horton builds in 125 markets in 36 states, making it a bellwether for the homebuilding industry. It sold more houses last year, 90,777, than any other builder nationwide, according to Builder magazine. Lennar edged D.R. Horton for highest revenue at $32.4 billion.
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Lower monthly payments
With construction costs rising sharply in recent years, builders are limited in what they can do to bring down home prices, according to Justin Benefield, academic director for Auburn University's Winchester Institute for Real Estate Development.
"I'm not surprised to hear D.R. Horton or any other national builder say they're building smaller homes," Benefield said in an interview. "That's a lever ripe for pulling right now to make housing more affordable."
Another way builders have been trying to help with affordability to boost sales is by offering mortgage-rate buy-downs and other incentives. In a buy-down, builders use profits from sales to lower buyers' interest rates, making their monthly payments more affordable. Some buy-downs are for the life of the mortgages, while other buy-downs guarantee lower rates only for a set period, such as a year or two.
Major publicly traded builders offering incentives to buyers is a near universal practice, but it's not as common among smaller builders, according to industry professionals.
More than 80% of D.R. Horton buyers using its mortgage company in July, August and September accepted a buy-down on their mortgage rate, up from 74% a year earlier, the builder said.
In the three months through Sept. 30, D.R. Horton reported homebuilding revenue of $9 billion, up from $8.8 billion a year earlier. Over the same time, home sales increased 3% to 23,647.