The nation’s largest homebuilder saw a sharp drop in demand from buyers last quarter — and especially in June — as buyers struggled with affordability due to higher interest rates and inflation.
Arlington-based D.R. Horton saw its sales decrease 7% year over year nationwide to 16,693 homes in its third fiscal quarter that ended June 30, the company reported Thursday. Its cancellation rate for sales orders was 24% compared with 17% a year ago, as more buyers pulled out of deals.
“Housing market demand remained strong during most of the quarter,” D.R. Horton CEO David Auld said on the company’s earnings call Thursday. “In June, we began to see a moderation in demand and an increase in cancellations due to the rapid rise in mortgage rates and continued inflationary pressures across most of the economy.”
The company’s expectations changed even over the course of the last month. At the beginning of the month, the company’s chief financial officer Bill Wheat predicted sales for the quarter would be flat versus the decline the company ended up reporting.
That shows how much more demand declined in June than the company anticipated due to an uptick in mortgage rates. The average rate for a 30-year fixed-rate mortgage rose from about 5% to almost 6% over the course of the month, according to Freddie Mac.
Auld said the uncertainty of the transitioning market “may persist for some time.”
When asked if any metro areas are presenting problems or have outsized strength, Auld said Texas and Florida will continue to drive national numbers, and that the Carolinas are also stable and strong, but he doesn’t see any particular areas as stressed or problematic.
Brian Yarbrough, an analyst for Edward Jones, said he expects D.R. Horton to see a sizable decline in sales next year and to cut prices, after the company had been consistently raising prices because of high demand.
“In an environment where inflation is running as high as it is, consumers are cutting back on discretionary purchases. There’s nothing more discretionary than a home,” Yarbrough said. “I just think things are going to get much worse before they get better.”
D.R. Horton’s co-chief operating officer Mike Murray said the company has still been able to resell the homes where buyers have backed out and canceled orders, just not immediately.
“By the time you resell it and requalify a buyer through the mortgage process, it could be a four- to eight-week to 12-week process sometimes,” Murray told investors. “But we’re still seeing good demand for the homes that we have.”
D.R. Horton still earned $1.6 billion in the quarter, up from $1.1 billion in the same quarter last year. Its revenues were up 21% for a total of $8.8 billion.
“Although demand has slowed from the frenzied pace we experienced over the last year, there are still qualified buyers in the market today as household formations continue and inflationary pressures drive rents higher,” Auld said.
The company slowed its home starts to 17,900 homes this quarter. Dallas-Fort Worth had a record 42,749 homes under construction, according to Dallas-based Residential Strategies, and local builders are pulling back to complete those homes and respond to the impact of higher rates.
Housing analyst Zonda found 67% of builders it surveyed across Texas indicated that sales cancellations increased in June, compared with 56% of builders nationally. Bryan Glasshagel, a senior vice president for Zonda in D-FW, said cancellations are still below pre-pandemic norms in most cases.
“So far, builders have been able to backfill most of the cancellations,” Glasshagel said, but he added that some are having to lower prices in some cases. Many builders, like D.R. Horton, are offering to buy down or lock in mortgage rates. “Strategies will be different from builder to builder.”
