The recent concerns over the new housing market's momentum slowing down due to increasing mortgage rates and disappointing housing starts data have been alleviated by D.R. Horton's (DHI, Financial) impressive Q2 earnings report. Despite a challenging interest rate environment, DHI's latest financials suggest a robust start to the spring selling season, offering a positive outlook for the sector.
In Q1, DHI experienced a dip in earnings per share (EPS) and a decrease in housing gross profit margin to 22.9%, attributed to heightened incentives like mortgage rate buy-downs and price reductions aimed at improving home affordability. These measures, while necessary, put pressure on DHI's profitability.
Before the Q2 earnings release, there was apprehension about DHI's gross profit margin potentially weakening further, especially after the stock's 11% decline since March end. However, DHI has managed to maintain, and even slightly improve, its gross profit margin on home sales to 23.2% in Q2, up from Q1, despite expecting to continue with high incentive levels in the near term.
Lower construction costs, particularly the significant drop in lumber prices since March 2022, have played a crucial role in counterbalancing the high incentives. DHI remains optimistic about its housing gross profit margin outlook, contingent on the interest rate trajectory, as construction costs have stabilized.
On the demand front, the limited housing supply in a high mortgage rate environment has not significantly changed. Homeowners are hesitant to sell and switch to higher mortgage rates, which has, in turn, supported DHI's home closings, which increased by 15% to 22,548 homes, surpassing expectations.
Despite ongoing concerns over sustained high interest rates, DHI has upgraded its FY24 forecasts, demonstrating confidence in its performance and growth prospects. The company now expects FY24 revenues to be between $36.7 billion and $37.7 billion and home closings to reach 89,000-91,000 units.
The key takeaway from DHI's Q2 earnings is the resilience of the homebuilding sector amidst rising interest rates, signaling a positive outlook for other homebuilders as they navigate through the earnings season.
