Builder D.R. Horton steps up buyer incentives as demand slows

D.R. Horton Inc. tempered its expectations for home sales and said it’s granting more buyer incentives to help navigate a slowdown in demand. 

The company expects to deliver 83,000 to 85,000 homes in its full fiscal year, according to its earnings statement Thursday, down from its previous projection of 88,000 to 90,000 homes. D.R. Horton’s deal cancellation rate for the three months through June rose to 24% from 17% a year earlier as soaring mortgage rates caught buyers by surprise. 

Fortunes are changing for homebuilders, which benefited from a surge in demand earlier in the pandemic, when both mortgage rates and listings for previously owned homes were hovering near record lows. Now, higher borrowing costs are forcing more buyers to pull back, and a growing supply of existing homes presents a competitive challenge for builders.

D.R. Horton builds on spec, meaning it rarely has contracts in place before beginning construction. That adds to the risk of rising inventories if homes aren’t sold quickly. On its earnings conference call, the company said it’s adjusting starts to moderating demand and expects to offer more buyer incentives in the current quarter.

Builders across the U.S. have been slashing prices as homes near completion and offering deal sweeteners such as mortgage rate buy-downs so they don’t sit empty. 

For its fiscal third quarter, D.R. Horton’s orders slipped 7% from a year earlier to 16,693, missing analysts’ estimates. On the call, executives said sales slowed considerably in June and July and cancellations rose, but noted some of that marks a return to more-normal seasonal patterns. 

The shares were up 2.3% to $74.73 at 11:01 a.m. New York time.

Price cuts and other incentives are likely to cause the company’s profit margins to shrink, according to Bloomberg Intelligence analyst Drew Reading.

“Horton’s order results reflect a material slowing of demand in June,” Reading said. “We expect similar commentary from industry peers and believe cancellations and incentive use will accelerate.”

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