July 26, 2018 / 10:11 AM / 2 years ago

Demand for affordable homes fuel D.R. Horton profit beat, Pulte orders dip

(Reuters) - D.R. Horton (DHI.N), the biggest U.S. homebuilder, on Thursday forecast revenue growth for 2019 after topping Wall Street quarterly profit estimates, underscoring strong housing demand.

FILE PHOTO: A house built by the D.R. Horton company is seen for sale in Arvada, Colorado January 24, 2017. REUTERS/Rick Wilking/File Photo

Over the past few years, homebuilders have enjoyed vigorous demand for affordable houses, bolstered by low interest rates, economic growth and an improving job market.

But, higher building material costs, and shortages of land and labor are pushing homebuilders to raise home prices, diminishing affordability as more millennials and first-time buyers enter the housing market.

An acute shortage of affordable homes in the United States will continue over the coming year, according to a recent Reuters poll, driving prices up faster than inflation and wage growth.

D.R. Horton, based in Fort Worth, Texas, beat profit estimates for the seventh straight quarter. It raised the low end of its full-year revenue forecast to $16.1 billion from $15.9 billion, keeping the high end at $16.3 billion. The company expects revenue to grow 10 percent to 15 percent in fiscal 2019.

“The company’s strategic shift towards more entry-level homes has paid off, with strong demand in this segment and limited supply,” Edward Jones analyst Robin Diedrich said.

“The positive results should help alleviate some of investors’ concerns around slower new home sales due to high prices and rising interest rates,” Diedrich said.

D.R. Horton posted a 12.3 percent rise in orders, an indicator of future revenue for homebuilders, in its fiscal third quarter ended June 30.

D.R. Horton’s Express and Freedom brands, which sell homes at lower prices, accounted for 40 percent of homes sold.

“That’s the main reason that’s differentiating us when you look at our sales versus some of the others out there in the industry today,” the company said on a conference call.

Smaller rival PulteGroup Inc (PHM.N) recorded second-quarter profit that topped analysts’ estimates on Thursday, but its orders dipped - the first decline in nearly three years.

D.R. Horton shares rose as much as about 9 percent and Pulte dropped about 5 percent.

“Affordability is important as sales prices have gone up and mortgage rates have ticked up. I think it’s the two things in concert that have contributed to a bit of the softness that we saw intra-quarter,” PulteGroup Chief Executive Officer Ryan Marshall said on a conference call with analysts.

Cheaper homes will be important to buyers as interest rates rise, pushing the cost of home loans higher. D.R. Horton’s average selling price was $302,000 in the quarter, while Pulte’s was $427,000.

Reporting by Arunima Banerjee and Sanjana Shivdas in Bengaluru; Editing by Bernard Orr

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