(Reuters) - No.1 U.S. homebuilder D.R. Horton Inc (DHI.N) on Tuesday said it expects lower incentive spending and strong buyer demand to benefit margins, sending its shares up about 6%.
Horton spent more on incentives in late 2018 and early this year as affordability concerns had hit demand for their homes, but said it was now seeing buyers return to the market.
“Interest rates on mortgage loans have since decreased so we reduced the level of incentives offered as the spring progressed,” Chief Executive Officer David Auld said on a post-earnings call with analysts.
Cheaper mortgage rates and the lowest unemployment rate in nearly 50 years are supporting demand for housing.
The 30-year fixed mortgage rate has dropped to an average of 3.81% from a more than seven-year peak of 4.94% in November, according to data from mortgage finance agency Freddie Mac.
Gross margins for the third quarter ended June 30 was 20.3%, above the homebuilder’s forecast of between 19.3% and 19.8%.
Horton said it expected gross margins for the fourth quarter to tick up, and forecast a range of 20.4% to 20.7%. Analysts on average expected 20.7%.
Horton’s results lifted homebuilders PulteGroup (PHM.N), Lennar Corp (LEN.N), KB Home (KBH.N) and Toll Brothers (TOL.N) between 1.8% and 2.5%, and pushed the S&P 1500 Homebuilding index .SPCOMHOME up 2.1%.
Horton beat profit and revenue estimates for the quarter as its average home price fell 2% to $296,450, pushing sales up 13.2% to 15,971 homes.
“We continue to see good demand and a limited supply of homes at affordable prices across our markets,” Auld said.
Orders rose 6.4% to 15,588 homes, but fell short of analyst estimates of 15,663 homes, according to IBES data from Refinitiv.
Net income attributable to the company rose 4.6% to $474.8 million, or $1.26 per share, in the third-quarter. Revenue jumped 10.6% to $4.91 billion.
Analysts, on average, expected a profit of $1.07 per share on revenue of $4.52 billion.
Horton’s stock trades at 10.5 times forward earnings, a premium to homebuilders Lennar, which trades at 8.5, PulteGroup at 8.9 and Toll Brothers at 8.6 times.
Reporting by Dominic Roshan K.L. and Sanjana Shivdas in Bengaluru; Editing by Shailesh Kuber