July 27, 2012 / 11:28 AM / 5 years ago

UPDATE 2-D.R. Horton profit jumps on rise in orders

By Michelle Conlin

July 27 (Reuters) - Top U.S. homebuilder D.R. Horton Inc reported a jump in quarterly profit and said new orders rose for the fourth straight quarter as the company continued to successfully execute its long-term strategy of building speculative starter homes for first-time buyers.

Horton’s net income rose to $787.8 million, or $2.22 per share, for the third quarter from $28.7 million, or 9 cents per share, a year earlier.

The results included a tax benefit of $716.7 million that was tied to losses during the housing implosion.

Homebuilding revenue climbed 14 percent to $1.1 billion.

On an earnings call with analysts Friday, Chief Executive Donald Tomnitz said that after the long, hard slog of the housing depression, the company was “now in a better position than at any time in my 29 years in the industry.”

The company said it expects sales to continue improving through the first part of July and profit to rise in the fourth quarter.

“We feel very good about the U.S. housing market, and we feel very strong about our position in the U.S. housing market in the face of a rather weak macroeconomic environment,” Tomnitz said.

This is the sixth straight quarter of profit for the homebuilder, which saw a 25 percent increase from the year-ago quarter in the number of new homes it sold despite the pressures still facing a housing market struggling to gain sustained strength.

“We’re closing on more homes than anyone else in the industry,” Tomnitz said.

Horton’s results mirror an overall trend in the industry, with homebuilders on track to have their best year ever. The Standard & Poor’s homebuilder index is up 42 percent this year.

But the sales surge among the builders is partly tied to the artificially low inventory of homes available for sale because banks have kept many foreclosed properties off the market for fear of depressing prices.

At the same time, nearly one-half of homeowners are effectively stranded in their homes and are not in a position to sell. That’s because they either have negative equity in their homes or less than the 20 percent equity required for a mortgage on a new residence.

In June, there were only 144,000 new homes available in the U.S., the lowest level in half a century.

Off such a bottom, builders are erecting new single-family homes at the fastest rate in two years, according to the Commerce Department.

The housing market remains a confusing place. This spring, as in the past few springs, many analysts called for a housing bottom. At the same time, a minority cohort warned that the U.S. is still at risk for a Japanese-style Lost Decade in terms of house prices.

The latest news from the housing front has also been contradictory.

In a positive sign, U.S. home builder sentiment surged in July to notch its biggest jump in nearly a decade, the National Association of Home Builders said last week.

But on the other hand, applications for loans to buy new homes fell. And the Commerce Department reported Wednesday that new U.S. home sales tumbled in June to their lowest level in more than a year, with prices resuming their downward slide.

Horton’s results are impressive, analysts say, given that more than half of its customers are young, first-time home buyers. That’s a demographic that’s been especially challenged in an environment of record amounts of student debt, wage stagnation and ultra-strict mortgage lending standards.

One countervailing trend is that homes have never been more affordable and mortgage rates have never been so low.

With rental vacancy rates also at record lows, rising rents are helping to create more home buying demand by pushing more renters to buy. It is now cheaper to own than it is to rent in virtually every major metropolitan area, according to John Burns Real Estate Consulting.

D.R. Horton said that its average customer had a credit score of 708 and had put a nine percent down payment on their home.

That compares to the overall average consumer credit score for those who were able to close on a mortgage in June of 746. On average, they put a 20 percent down payment on their new home and they were still on track to spend no more than 23 percent of their income on their new house, according to the Ellie Mae Origination Insight Report.

To grow margins, Horton - like its competitors - is attempting to lure more move-up buyers, who spend more on homes. The company is also adding more customizable features.

“All of our homebuilding regions were profitable in the third quarter, and each region reported increases in sales, backlog, revenue and pre-tax income compared to last year,” Chairman Donald Horton said in a statement.

On Thursday, D.R. Horton’s biggest competitor, PulteGroup Inc, also reported a sharp jump in new orders and better-than-estimated profit for the second quarter.

Horton’s shares, which have risen nearly 50 percent this year, were down 2.1 percent to $18.40, in Friday trading on the New York Stock Exchange.

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