Chart of the Month (May 2023)
Chart Provided by FACTSET®
Chart Description
- The chart above shows the average selling price of new home sales at D.R. Horton.
- D.R. Horton is the largest residential construction company in the United States.
- Per the chart, the average selling price was slightly less than $300,000 in June 2020.
- By June 2022, 24 months later, the average selling price was over 38% higher at $415,000.
- As of the most recent quarter reported, March 2023, average selling price had fallen by over 10% to $372,000.
Our Take
There are two key takeaways that immediately jump out at us when viewing this chart:
- Recent growth is unnatural.
- The explosive price growth experienced in home prices from 2020 to 2022 was completely unnatural. In just 24 months, prices increased by 40%. That is about 60% faster than the rapid runup in prices that we saw in the early 2000s, when prices increased by approximately 43% from December 2001 to March 2005. That period is now commonly referred to as the “housing bubble” and most economists and market analysts attribute the rapid increase in prices during the first decade of the 21st century to the accommodative policies by the Federal Reserve. And yet, that period pales in comparison to what we’ve seen in the last few years.
- Current prices are unsustainable.
- In addition to 40% higher prices, mortgage interest rates are another factor that makes the current level of home prices unsustainable. Rates have more than doubled from a low of ~ 2.65% in the fall of 2020 to current rates topping out at about 7%. The combination of 40% higher prices and rates that are 2.6x higher has a devastating effect on a borrower’s monthly mortgage payment. The monthly P&I (principal and interest) payment in December 2020 (assuming a price of $315k, 20% down payment and 2.65% 30-year fixed rate) was $1,015. In June of 2022 (with a home price of $415k and a 7% 30-year fixed rate) the P&I payment had more than doubled to $2,208. Add in higher real estate taxes and higher prices at the checkout counter (and just about everywhere else) and you have a difficult proposition for most potential buyers.
Even in a challenging environment, investors remain bullish on shares in D.R. Horton (DHI). Despite a decline of ~ 5% since the middle of May, shares of DHI remain up close to 20% in 2023 and up over 100% since Jan 2020. The resiliency in the share price seems to be related to the ongoing
narrative that “we don’t have enough houses” and the company’s ability to navigate the increasingly choppy waters thus far by delivering strong operating results. Other than acknowledging that home construction fell off dramatically following the 2007–2009 Great Financial Crisis, we don’t have much to add to the debate about the need for more homes. What we are more confident in is the observation, derived directly from the chart above, that the recent operating strength has been driven by significant price discounts for the first time since 2020. We don’t believe that emerging trend bodes well for shareholders in DHI. In fact, given that housing accounts for 15–18% of the entire US economy, it may be a flashing yellow light for the broader market.
JPS Financial, LLC is registered as an investment adviser with the SEC. All information is believed to be current and should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. All investments and strategies have the potential for profit or loss.
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