Majestic Research

Bloomberg

D.R. Horton Says Second-Quarter Home Orders Fell 37%

By Kathleen M. Howley and Brian Louis
Published: April 10, 2007

D.R. Horton Inc., the second-largest U.S. homebuilder by revenue, said orders for houses tumbled 37 percent in the first three months of this year.

Orders for the fiscal second quarter fell to 9,983 houses from 15,771 a year earlier, the Fort Worth, Texas builder said in a statement today. The value of houses ordered plunged 41 percent to $2.6 billion from $4.4 billion a year earlier.

Builders including D.R. Horton and industry leader Lennar Corp. are in their second year of slowing sales as buyers wait for prices to stop falling before making an offer. As lenders raise credit standards because of rising subprime mortgage defaults, D.R. Horton may be hurt more than some competitors because it caters to first-time and first-time move-up buyer, said John Tomlinson, an analyst at Majestic Research in New York.

“If credit standards get tighter and banks become more stringent, they could feel it more than other builders,” Tomlinson said in an interview.

First-time homebuyers typically don’t have a lot of money for a down payment and they may have lower credit scores because of bad credit or a limited credit history. Banks may also be requiring larger down payments and that may eliminate some potential buyers from the market.

D.R. Horton’s shares fell 34 cents to $21.70 in New York Stock Exchange composite trading. They’ve fallen 36 percent in the last 12 months, compared with the 34 percent decline in the Standard and Poor’s Supercomposite Homebuilding Index of 16 companies. 

A year ago, D.R. Horton reported orders rose 9 percent, a third of the gain seen in the second quarter of 2005.

Growing Inventories

Rising numbers of unsold houses on the market have hurt demand and pushed builders to offer sales incentives such as granite countertops and discounts on the sales price to entice potential buyers. Growing foreclosure rates among borrowers with poor or limited credit histories also is adding to the number of homes for sale.

“The spring selling season has not gotten off to its usual strong start,” Chairman Donald Horton said in today’s statement.

Stricter lending practices and the overhang of existing and new homes for sale will make it difficult for the new-home market to recover this year.

Tough Year for Builders

“When you couple those two factors, it will probably lead to a tough year for most builders,” Tomlinson said.

The average price for a D.R. Horton house ordered in the quarter fell 6 percent to $260,373 from $276,660 a year earlier. The company sells houses priced from $90,000 to more than $900,000. Horton said in the statement “we continue to see an increase in the use of sales incentives in many of our markets.”

The rate of home cancellations by customers was 32 percent in the second quarter, above the company’s historical average of 16 percent to 20 percent. Margaret Whelan, an analyst at UBS in New York, said in a note to clients today that she expects the cancellation rate to remain high in 2007 “as the benefit from price reductions is offset by the negative impact from tighter credit standards.”

D.R. Horton will report its fiscal second quarter earnings on April 19.

Separately, Marsico Capital Management LLC slashed its stake in Miami-based Lennar, the biggest U.S. homebuilder, in which it had been the largest shareholder.

Marsico cut its stake to less than 1 percent and it now holds 5,898 shares, according to a filing today with the U.S. Securities and Exchange Commission. Denver-based Marsico had previously owned 19.6 million shares.

Shares of Lennar fell 63 cents to $42.28 in New York Stock Exchange composite trading.