Largest U.S. homebuilder reports shrinking profits—that’s good news for buyers

A dismal housing market has forced America’s largest homebuilder to slash prices and offer other incentives in an effort to boost sales. And it’s costing them.

According to its latest earnings report, Texas-based builder D.R. Horton’s gross profit margin declined to 22.9% in the first fiscal quarter of 2024. The company expects similar profit margins in the second quarter.

Gross profit margin is the money left over after subtracting the cost of goods and services.

Per Axios, D.R. Horton’s profitability has declined for two consecutive quarters and in five of the last six quarters. The company’s profit margin peaked at 30% in 2022 before rising interest rates dampened housing demand.

D.R. Horton closed nearly 85,000 home sales in 2023, in addition to nearly 8,000 rental units.

The company’s declining profitability was partly attributed to “higher incentives” and aggressive cost-cutting to encourage more buyers to close.

“Homebuilders are offering buyers interest rate buydown incentives that funnel demand into the newly built segment,” according to Bill Adams, chief economist at Comerica Bank. “They are also shrinking floor plans to boost affordability.”

A combination of incentives and razor-tight inventories of existing homes benefited homebuilders in the latter half of 2023—albeit very briefly.

According to the Department of Commerce, new home sales surged to a 19-month high in September amid widespread price cuts. However, activity would plunge over the next two months, with sales hitting one-year lows in November.

Industry experts say builders can offer all the incentives they want, but the biggest domino effect on housing still comes from interest rates.

Mortgage rates may have peaked, but they remain elevated

Creditnews reported in November that mortgage rates had likely peaked. At the time, the average 30-year fixed-rate mortgage was 7.5%, not far from the 23-year high of 7.79%.

Fast forward to today, and 30-year rates are down to 6.6%, the lowest since May 2023, per Freddie Mac.

But housing affordability remains a challenge at these levels, considering that rates were sub-4% just a few years ago. As Creditnews Research reported, nearly two-thirds of existing mortgages were locked in below 4%.

The affordability challenge extends far beyond new builds and includes existing homes, which account for 88% of the market.

According to the home listing website Zillow, rates at current levels “continue to hamper demand,” forcing sellers to cut prices.

“Price cuts are more common than normal—chances are good that prices are negotiable,” Zillow said, adding that 25% of its October listings had price cuts. This figure was 22.5% in November.

These conditions are unlikely to change very much unless rates come down further, according to Lawrence Yun, chief economist at the National Association of Realtors (NAR).

“The question is when are rates going to come down,” he said, suggesting that lower rates could hold the key to a housing recovery.

While some experts believe rates will improve this year, they’re unlikely to return to pre-pandemic levels.

“The expectation is not that mortgage rates are going to fall super significantly,” said Hannah Jones, an economic research analyst at realtor.com.

“I think that our own expectations align with that as well that while mortgage rates may come down, we’re not going to see pandemic-era rates next year,” she explained.

Elevated costs affect builders, too

Although much of the discussion around interest rates focuses on homebuyers, builders like D.R. Horton are also impacted by higher financing costs.

Higher interest rates “increase the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability,” according to Alicia Huey, chair of the National Association of Home Builders.

And while groundbreaking on new housing projects is expected to grow in 2024, “buildings will face growing challenges with building material cost and availability,” Huey said in a recent report.

So it’s not just high interest rates that affect builders—the cost of supplies is also rising.

“Lumber is so crazy, I’m not selling a house until it’s built,” Mickeal Soliman, CEO of New Jersey Contractors and Builders, told Forbes.

“When you start telling people that the cost of their build is going to rise because lumber prices are rising, they start asking questions and getting worried. It’s not worth it. Now, we just build new homes and the price is the price when it’s done,” he said.