(This is an excerpt from an article I originally published on Seeking Alpha on January 29, 2014. Click here to read the entire piece.)
In several posts, I have noted that the consolidation in 2013 for homebuilder stocks could become a springboard for a fresh rally in 2014. It seems the homebuilder breakout may have begun early with D.R. Horton (DHI) jumping the fence first.
On January 28, 2014, DHI reported strong financial results for its fiscal first quarter. Most importantly, DHI was extremely bullish about the coming spring selling season which appears to have started earlier than usual. Here are some representative quotes from the conference call (all quotes in this piece are sourced from Seeking Alpha transcripts of the conference call):
{snip}
Source: FreeStockCharts.com
Almost all of DHI’s financial metrics turned in a similarly strong showing. {snip}
The quality of buyers remains strong with an average FICO score of 719. First-time homebuyers dropped from 50% to 41% of the mix because of a change in he type of home DHI sold. The company reassured analysts on the call that its focus remains on first-time buyers and first-time move-ups.
Buyers have adjusted to higher rates. While DHI expects rates to increase over the course of the year, it does not expect much of an impact, especially for the spring selling season. The company’s research demonstrates that employment has the strongest correlation to housing demand. So, if rates are increasing in the context of an improving economy, home sales should be fine.
New mortgage underwriting guidelines are acting as a speedbump as they slow down the buying process. Additionally, DHI does expect more inventory to come into markets with a lot of investor activity – like Las Vegas and Phoenix – as plateauing prices encourage investors to start unloading some of their homes.
{snip} I expect a large portion, if not all, of that recent surge will now roll back in the face of these strong data and results. Even if they do not, DHI should be one of the strong performers for this year, even if it is just to recover 2013’s high 20% above current levels.
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on January 29, 2014. Click here to read the entire piece.)
Full disclosure: no positions