Horton's Bet on First-Time Buyers Paying Off

D.R. Horton's bet on first-time buyers is starting to pay off, and the builder anticipates expansion plans for its entry-level home division will boost both its construction and mortgage lending activities.

The nation's largest builder booked 7,370 home sales in the fiscal-year first quarter ending Dec. 31, up 35% from a year ago. Horton posted net income of $142.5 million in the quarter, up 16% from a year ago, the Fort Worth, Texas, company said Monday.

The Express Homes brand launched in April 2014, selling homes priced between $100,000 and $150,000, and the builder has since developed Express Homes communities in 38 markets in 11 states. The division accounted for 13% of homes sales, 10% of homes closed and 6% of home sales revenue, with an average sales price of $169,000 during the fiscal first quarter. Horton also builds mid-priced and luxury homes.

"Customer response to our affordable Express product offerings has been extremely positive, and we expect to have Express Homes communities open in a substantial majority of our markets by the end of this fiscal year," Jessica Hansen, vice president of investor relations, said during a conference call with investors.

During the quarter, first-time buyers accounted for 40% of loan originations by Horton's mortgage arm, though Hansen noted that Express Homes purchases financed by DHI Mortgage have a share of first-time buyers that's "running higher than the company average."

The builder's executives expect the Express brand to grow quickly as a percentage of its product mix because there is little competition from other builders at that price point, which has left many first-time buyers locked out of the new home market.

"I think that's been an underserved market segment and…they're getting a new home product at a very affordable price as an alternative they haven't had," said COO Mike Murray.

Meanwhile, the Federal Housing Administration's recently announced 50-basis-point cut to its annual mortgage insurance premium has created a buzz among potential buyers. Horton's sales staff is already using the new FHA pricing in its marketing efforts, while media coverage of the change has prompted greater consumer awareness.

"Whether they are educated about exactly what it means or don't know exactly what it means, it has people talking about buying a house. And that's always a good thing for us," said CEO David Auld.

FHA and Department of Veterans Affairs loans comprised 42% of DHI Mortgage's originations in the first quarter, down from 45% a year ago. Among both conventional and government-backed loan products, borrowers had an average FICO score of 717 and average loan-to-value ratio of 89%.

D.R. Horton is "well positioned to take advantage of loosening credit standards throughout 2015 — particularly given the recent 50-bps reduction in the FHA's annual mortgage insurance premium and the company's continual expansion of their first-time home buyer Express Homes brand," analyst Graham Wilkes said in a Jan. 27 Compass Point Research & Trading LLC report.

On Tuesday, the Commerce Department's Census Bureau reported new home purchases jumped to the highest level in more than six years.