By Bill Hethcock  – Senior Reporter, Dallas Business Journal Dec 2, 2019, 4:05pm EST

U.S. home builders benefited from low interest rates this year as housing starts climbed to levels not seen in a decade and new-home sales surged after a disappointing 2018.

Homebuilder D.R. Horton Inc. is outperforming its construction-industry competitors across multiple metrics, according to analysts who have recently weighed in on the Arlington-based company.

D.R. Horton’s (NYSE: DHI) earnings growth makes the company’s stock attractive, according to a Zack’s Equity Research article published Monday.

The company has a projected earnings per share growth rate of 13.6 percent this year, which is more than twice the expected industry average of 5 percent EPS growth, according to Zack’s.

D.R. Horton looks strong from a sales growth standpoint, too. The company’s sales are expected to grow 7.6 percent this year compared to the industry average of 0.9 percent, Zack’s reported.

The national homebuilder is seeing strong sales trends, especially in Texas and California, Bill Wheat, chief financial officer of D.R. Horton, said in a recent conference call with analysts.

David Auld, president and CEO, said in the same call that the company is working to consolidate market share. D.R. Horton, which has been the country’s largest homebuilder by volume since 2002, is the number one builder in 13 markets nationwide and is among the top five builders in 32 U.S. markets, Auld said.

D.R. Horton is also benefiting from multiple relatively recent acquisitions, said Chris Jasinski, managing partner and co-founder of Charlotte-based JTW Advisors, a M&A advisory firm focused on the homebuilding industry.

“Nationally, they’ve been an acquirer of builders as a strategy to enter new markets, and they’ve done a wonderful job of it,” Jasinski said in an interview with the Dallas Business Journal. “They have a great team that is looking for quality builders.”

In the past two years, D.R. Horton has acquired Iowa-based Classic Builders and Indiana-based Westwood Homes. In late 2017, D.R. Horton also purchased a minority stake in Forestar Group Inc. in a deal that made the Austin company a wholly owned subsidiary of D.R. Horton.

As part of the $60 million purchase of Classic, D.R. Horton received 670 lots, 130 homes in inventory and 40 homes in sales order backlog, as well as roughly 550 lots through option contracts. Classic Builders was the largest homebuilder by volume in Des Moines, Iowa.

D.R. Horton paid $190 million for the homebuilding operations of Westport Homes, a top-five homebuilder in Indianapolis and Fort Wayne, Indiana, and Columbus, Ohio. The acquisition included 3,500 lots, 400 homes in inventory and 550 homes in sales order backlog.

U.S. home builders benefited from low interest rates this year as housing starts climbed to levels not seen in a decade and new-home sales surged after a disappointing 2018.

Builder confidence, as measured by the National Association of Home Builders, is now the highest since 1999. And publicly traded home-builder stocks beat the S&P 500 average this year, rising 40% as of Dec. 23, compared with the broad index’s 29% gain over the same period.

Home builders cranked up volume partly by focusing on homes more buyers can afford. Large builders including Meritage Homes Corp. and MDC Holdings Inc. made strategic shifts to produce a higher number of less-expensive homes, targeted at a generation of millennials with lower purchasing power than average buyers in the past.

In the third quarter of this year, the average price of a Meritage home fell 4.4% while the number of home orders rose 24%, driven by demand in the entry-level category. Through the RoofHome-builder stocks have outperformed the S&P 500 this year.Industry versus broad marketSource: FactSet%S&P HomebuildersSelect IndustryS&P 500Jan. ’19MarchMayJulySept.Nov.-5051015202530354045S&P Homebuilders Select IndustryxAug. 23, 2019×25.63%

“You’re seeing shifts down in average price,” said Jonathan Boise, a home-builder analyst at Fitch Ratings. “Typically, for the builders that are focusing on entry-level product, that’s resulting in stronger growth than their peers.”

Strong buyer demand for more-affordable homes stoked mergers and acquisitions. In November, Taylor Morrison Home Corp. said it would purchase a West Coast competitor, William Lyon Homes, a company that does more than half of its business in the entry-level market. Scheduled to close in 2020 and valued at $2.4 billion, the deal was among the largest announced in the industry this year.

Some home builders and analysts question whether growth will continue at the current pace next year. Fitch, for example, predicts new-home sales will only grow 1.5%, compared with 9% in 2019.

Interest rates are expected to remain low, meaning mortgage costs will still be cheaper than in 2018, a continued incentive for more buyers to come into the market. And Fannie Mae forecasts that housing-construction starts will increase 10% next year to reach a postrecession high, giving supply a needed boost.

But cost increases fueled by labor shortages and regulatory challenges are making it harder to deliver homes with affordable price tags, according to builders. Labor costs are going up partly because home builders are having a hard time recruiting workers in a strong economy.

“We’re fighting the agriculture industry, the restaurant industry for the same people,” said Chuck Fowke, a custom-home builder in Tampa, Fla. “Today, you’ve got a lot of young people going to work for FedEx or Amazon, and a lot of times in our industry there aren’t benefits available for entry-level people that are starting out.”

As a result, residential-construction workers are more likely to be older than the workforce at large, and the industry continues to be short 300,000 to 400,000 workers in any given month, according to Robert Dietz, the National Association of Home Builders’ chief economist. Worker productivity in the sector has been mostly flat for more than two decades, he said.

Trade concerns remain a problem for the industry. Although lumber prices have since fallen, a 2018 price increase related to the Trump administration’s Canadian tariffs was enough to raise the average home construction cost by $9,000, according to the group.

“Those tariffs are still in place,” Mr. Dietz said.

Next year could be riskier for home builders as more companies move to meet demand from entry-level shoppers, who “typically look for homes that could be delivered within a short period,” according to a recent Fitch report.


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To meet demand, some home builders are planning to build more “on spec,” building homes that don’t yet have buyers, as opposed to building based on customer orders.

Thanks in part to the industry’s strong showing in 2019, analysts said mergers and acquisitions could continue in 2020, with publicly traded builders accounting for a greater share of total home-building. Fitch, for example, expects regional builders focused on the entry level to be attractive targets for acquisition.

Large builders are looking at companies with landholdings that are legally ready to be developed. Such deals are a way to navigate long permitting processes, said Chris Jasinski, managing partner at JTW Advisors, which advises in home-builder mergers. “Increasingly it’s just another land-acquisition vehicle,” he said.

Source: Dallas – Business Journal