Why the longer-term outlook for D.R. Horton is good

Market Realist

A key guide to D.R. Horton and its 3Q14 earnings (Part 5 of 5)

(Continued from Part 4)

D.R. Horton plans to work harder to serve the first-time homebuyer

D.R. Horton’s (DHI) CEO, Donald Tomnitz, said that the first-time homebuyer will drive the next leg in this sector and has been underserved in this recovery. He put some of the blame on tight credit, but also on the builders failing to reach out to first-time homebuyers. D.R. Horton plans to offer a line of $120,000-to-$150,000 homes to address this market.

The macro picture for the builders looks good

People forget that a housing bust is getting pretty old. The housing market peaked in 2006, which was eight years ago. A lot of excesses from the bubble have been worked off. In many ways, we’ve seen the opposite problem—a shortage of existing and new inventories. Part of this trend resulted from foreclosure laws and the other part from cautious builders.

Take a look at the above chart. It shows housing starts going back to 1959. You can see that housing starts have averaged about 1.5 million units since 1959. For more information, read Housing starts hit post-2008 high: Great news for homebuilders .

Since the bust, we’ve been about half that number. That’s a lot of underbuilding over the past six years. The only thing that has kept a semblance of normal supply and demand has been the low household formation numbers that have accompanied the Great Recession. For more information on household formation, read Why household formation matters to homebuilder companies.

The important thing to keep in mind is that those numbers weren’t due to fertility rates 25 years ago. They were due to a lousy economy. This means there’s tremendous pent up demand that will unleash once the economic recovery filters down to the young.

Homebuilders with lots of exposure to the first-time homebuyer—like D.R. Horton and PulteGroup (PHM)—will benefit from this demand the most. D.R. Horton plans to address the first-time homebuyer directly. Maybe it’s time to rotate out of luxury builders like Toll Brothers (TOL) and NVR (NVR).

Investors interested in the homebuilding sector as a whole should look at the SPDR S&P Homebuilders ETF (XHB).

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