Unveiling The Blueprint Behind How America’s Largest Homebuilder Cornered The Housing Market
Source: Fast Company, Lance Lambert
Photo: 3844328/Pixabay
D.R. Horton, the nation’s largest publicly traded homebuilder, says it won’t stop offering mortgage-rate buydowns—even if interest rates tumble.
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Last summer, D.R. Horton’s then-CEO, David Auld, who has since stepped down and moved into a board role, told me that mortgage-rate buydowns not only assisted the giant homebuilder in navigating the market during the mortgage-rate shock but also provided the builder with an edge over the resale market and other builders.
“To address affordability concerns in the market, we introduced increased incentives . . . and adjusted base pricing of our homes where necessary. Our most successful incentive recently has been interest-rate buydowns. We are generally offering a point below market on a 30‐year fixed-rate mortgage for the life of the loan,” Auld told me in June 2023.
On Tuesday’s earnings call, D.R. Horton executives made it clear that mortgage-rate buydowns have been so successful that the nation’s largest publicly traded homebuilder, which ranks No. 120 on the Fortune 500 and has its own in-house mortgage company, plans to keep offering buydowns even if mortgage rates fall.
“I believe on a go-forward basis, staying competitive in not only the new home market, but especially in the resale market for us, the ability to have a lower monthly payment for the same cost of a home is advantageous. We have no plan in the near term to stop utilizing [mortgage-rate buydowns] even if we see rates shift down,” Paul Romanowski, who became D.R. Horton’s CEO in October, said on Tuesday’s earnings call.
Following Tuesday’s earnings release, D.R. Horton’s stock dropped 9%, falling from $157 to $143 per share as Wall Street reacted to the company’s margins, which came in slightly lower than expected for its fiscal Q1 2024, covering the three-month period ending on December 31. Earnings fell a bit more than expected due to D.R. Horton’s increased spending on mortgage-rate buydowns in the final months of 2023 as it tried to continue selling homes in an environment where mortgage rates briefly exceeded 8%.
According to the company, it increased spending on buydowns last quarter because mortgage rates hovered around 8% in October and November. D.R. Horton reported that around 80% of buyers in the latest quarter chose a buydown, in contrast to around 70% in the prior quarter.
While offering aggressive mortgage-rate buydowns has coincided with builders’ margins decreasing from the highs achieved during the pandemic housing boom, it’s worth noting that most publicly traded builders still maintain margins that exceed pre-pandemic levels. That includes D.R. Horton (see chart above).
What do D.R. Horton’s buydowns look like right now?
It varies a lot by market and community.
In the Enclave at Flat Rock Hills new-build community just east of Atlanta, D.R. Horton is currently advertising a “1/1 buydown program,” which offers a 3.99% rate for one to two years on FHA/VA loans, followed by a 4.99% rate for the final 28 years of the 30-year mortgage. It’s for select homes that go into contract before February 29, 2024.
Meanwhile, D.R. Horton’s Piatt Preserve new-build community just north of Columbus, Ohio, is currently advertising a “5.25% fixed-rate conventional mortgage” on certain inventory that goes into contract before February 29, 2024.