D.R. Horton Pricing Spineometer: 2 of 5 Vertebrae

D.R. Horton, a residential housing developer, had a positive Q3 2024. Revenue rose 5.8% to $9.2 billion and earnings before interest and taxes rose 7.4% to $1.5 billion over the same period last year.

A review of D.R. Horton’s 18 July 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

After paying tribute to Don Horton, founder of D.R. Horton, who passed away in May, executives turned to the issue of the economy and its impact on business performance.  All executives in the earnings call indicated a strong awareness of the importance of pricing.

• David Auld, Executive Chairman at D.R. Horton, said, “To address affordability, we are still using incentives such as mortgage rate buy downs, and we have reduced the prices and sizes of our homes where necessary.”
• Paul Romanowski, CEO at D.R. Horton, expressed concerns regarding the inflation and interest rates remain elevated, supply of affordable homes is limited and demographics support favorable demand.
• Bill Wheat, CFO at D.R. Horton, said, “The average price of net sales orders in the third quarter was $378,900, which is flat sequentially and down 1% from the prior year quarter.”
• Michael Murray, COO “With regard to pricing increases or price decreases, that’s occurring very much week to week at a community level by our operators as they’re gauging their market demand, their inventory conditions, and their future lot supply.”

D.R. Horton tends to serve first-time home buyers or buyers of modest homes.  69% of homes sold were for less than $400K.  Less than 11% of their sales were for homes greater than $500K.  (These price points would suggest they don’t serve dense urban cities like Chicago, San Francisco, or New York City.)

Price per square foot is a key metric for housing. Depending on the dataset being evaluated, between 70% and 97% of the price of a home is determined by the square footage.  Higher correlations are related to examining individual neighborhoods in a relatively recent time period. D.R. Horton reported that price-per-square-foot was relatively flat with less than 2% inflation for the year.

To serve this market well in this economic environment and still earn a profit for shareholders, D.R. Horton explicitly states that one of their strategic pillars is to maintain “disciplined and profitable revenue growth.”

Industry benchmarks would suggest D.R. Horton to have 70 to 350 professionals dedicated to pricing.

1. With operations in 121 different markets across 33 states, and from the statements of Michael Murray regarding local control of pricing, we would most of the pricing professionals to be distributed across the states in individual markets.
2. Outside of pricing the units themselves, D.R. Horton explicitly stated that they offer promotions, incentive packages, and rate buy-downs. Each of these commercial policies would increase the need for pricing professionals to drive rational decision-making.
3. R. Horton competes with other home developers but their largest competitor is the sale of existing homes. This implies a need for economic condition monitoring and a feedback loop into pricing decisions.
4. Given the economic impact of inflation and interest rates on pricing today, and the impact of reduced demand during the Great Recession of ’08, we would also expect a bevy of applied economist on their team to enable agile and informed pricing decisions.

Research into the investment by D.R. Horton in pricing yielded lackluster results.

1. A director of revenue management could be identified but no other pricing-specific professionals were found. Job openings with the keyword “pricing” yielded opportunities for property management, land development, estimating, and other categories, half of which would be more related to cost management rather than price management.
2. The research leads to a suspicion that pricing is largely the responsibility of sales, marketing, and property management professionals without the support of a dedicated pricing or economics team.
3. This strategy might work well if pricing of housing properties were truly a function of supply and demand alone and pricing strategy and value proposition details were unimportant, but even then a study of elasticity or economic models of the impact of demand and supply shifts would be useful.

Given the importance and capability of pricing at D.R. Horton as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of July 2024.

D.R. Horton Pricing Spineometer: 2 out of 5 Vertebrae. Pricing decisions are being at D.R. Horton that aren’t necessarily badly made but I suspect that if greater intellectual rigor and cross-market cohesion on the subject would improve financial results.

DHI (D.R. Horton, Inc..) rose from 162 the day prior to their earnings call to 174 one day later. FY 2023 revenue of $35.5 billion with a 17% operating margin and P/E ratio hovering around 10.

For FY 2023, a 1% improvement in price would yield a 6% improvement in operating profits holding all else constant at D.R. Horton.