So far, the story of the past few months for pretty much every builder has been a massive jump in demand driven by the COVID-19 crisis. We have recently heard from industry heavyweights Lennar and PulteGroup. America's biggest homebuilder, D.R. Horton (NYSE: DHI), recently reported and the common thread is a massive uptick in demand and orders. Interestingly the data points were supported by recent economic data out of the U.S. government. This means that D.R. Horton should see a continuation of its recent growth for the forseeable future.
Massive jump in the homeownership rate
The United States Census Bureau just reported that the homeownership rate in the second quarter of 2020 increased to 67.9%, compared to 64.1% in the first quarter of 2020. This represents a sea change in the attitude of homebuyers. It is certainly possible that complications from COVID-19 may have created measurement errors that will be revised away later. After all, a 3.8 percentage point jump is way out of line with historical quarterly changes. The trend of increasing homeownership rates is unmistakable, though. Demand is accelerating for single-family homes and we already have a massive inventory shortage.
Orders and demographics
In the aftermath of the 2008-2009 financial crisis, millennials avoided home-buying, preferring to live in urban, walkable neighborhoods. It turns out that this wasn't a wholesale change. The big rush of millennials buying homes was just delayed; it wasn't a change in attitudes about homeownership by a generation that witnessed a housing bust first hand. It seems that each generation over the past 50 years has married later, had kids later, and bought homes later. On D.R. Horton's conference call Wednesday, CEO David Auld discussed his view of the demographic and attitudinal shift that has been influenced by the COVID-19 crisis:
I think that's a trend that was in place before the COVID-19 program and I think it's really tied toward the millennial being a more conservative disciplined buyer of homes than previous generations. They were forming households later, having children later, and I think this pandemic has accelerated that trend. And like ... pent-up demand or pull forward demand or there's just a whole lot of people out there that I think are going to be looking for housing over the next five plus years.
The company's orders certainly support the idea of increased demand. Orders were up over 50% in May and June, and the company said that July was up 50% year over year as well. A 50% jump in orders for May, June, and July seems to be the common experience across the industry, at least from the builders that have reported already.
Plenty of financial firepower to build the business
Pivoting to the financials, D.R. Horton's revenue increased 10% year over year in the third quarter to $5.4 billion. Homes closed increased 10% to 17,642 units. Orders were up 38% to 21,519 units and 35% in dollars to $6.3 billion. Gross margin increased to 21.6%, which was an improvement of 30 basis points compared to the March quarter and 130 basis points from a year ago. Earnings per share rose 37% to $1.72. Cash on hand increased to $1.9 billion and liquidity increased to $3.7 billion. The company has $2.5 billion in homebuilding debt and only $400 million coming due in the next 12 months.
The company is certainly in a position to ramp up land spend with plenty of liquidity. The company's public but internally controlled subsidiary Forestar (NYSE: FOR) is the land development arm of D.R. Horton and will be heavily involved in the increasing land spend. About 77% of Forestar's land holdings are either under contract to D.R. Horton or subject to the company's right of first offer.
Despite the overall economic weakness, the homebuilding sector is in a good position, with huge demand and rock-bottom interest rates. The biggest gray cloud (and it isn't much of one) is related to input costs. Skilled construction labor is still scarce, and the cost of lumber has more than doubled since prices fell dramatically in early April.
This could affect gross margins, although demand is so high the company may be able to pass on those added costs to buyers. So far, gross margins are strong, but that will be a concern going forward. D.R. Horton is trading as 12.5 times expected 2020 earnings and is at the beginning of what might be a multi-year housing cycle. With a focus on the entry-level homebuyer, D.R. Horton is well-positioned to benefit from an extended period of homebuilding expansion.
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