Buffett Or No Buffett, Horton's Dominance Is Almost A Given

[Note: Due to an editorial error, an earlier version of this article posted an incorrect image rendering of D.R. Horton CEO Paul Romanowski. The Builder's Daily regrets the error.]

A week ago, Warren Buffett's Berkshire Hathaway made news as it came to light that Berkshire sold off 5,969,714 shares of D.R. Horton by December 31, 2023. The move baffled analysts.

Motley Fool analyst Keith Speights writes:

The biggest head-scratcher with Buffett's Q4 transactions was the sale of all of Berkshire's shares of D.R. Horton (DHI -0.11%). Granted, D.R. Horton was only a small holding for Berkshire – a little under 6 million shares worth close to $642 million at the end of the third quarter. However, the complete exit of the position is still puzzling to me."

ResiClub Analytics' Lance Lambert writes:

While we don’t know why Berkshire Hathaway—which is notoriously tight-lipped through much of the year—sold off their D.R. Horton stock, we do know that homebuilder stocks had a huge run up in 2023. That’d be hard to repeat again."

Lambert's one hunch sounds like he may believe the Oracle of Omaha and his investment strategists may know something others don't.

The most significant downside risk for homebuilding is the broader economy. If the fastest rate-hiking cycle ultimately leads to a recession and a surge in unemployment, builders could be vulnerable, at least in the short term."

Ironically, a few days before word of Berkshire's vaunted exit of D.R. Horton, Citi hosted its 2024 Global Industrial Tech and Mobility Conference in New York, where D.R. Horton CEO Paul Romanowski and Jessica Hansen, Senior VP - Investor Relations, spoke at length with inquiring minds among investment advisors and analysts.

Three of Romanowski's quotes stood out, and – especially in light of the headlines around Berkshire's unloading of the stock – we wanted to highlight them as stark expressions of a market mover's power and influence in a business domain.

Here they are in order. We'll come back around to providing perspective on these short quip-like declarations, but they're the "reason why" for this piece because they speak to a market leader whose ambition continues to be world domination:

On Land Returns

We continue looking towards a 24-month cash back and a minimum 20% return. That’s going to scale up based on risk profile, whether it’s raw land compared to a developed lot that we’re purchasing, but we continue to look closely at all of those deals and communities that we’re underwriting."

On Innovation

More than a broad-scale innovative change in how we do it, it’s the consistency and rhythm in which we do it, right? And continuing to simplify and create an efficient process in our business."

On the Risk Of Oversupplying the Market

It is getting harder and harder to put a lot on the ground. From a government entitlement and approval standpoint, and from availability at locations that people feel comfortable being, there are guardrails on the ability to bring the lot to market. Without the lot, we cannot build a home.

The conference's timing coincided with what's commonly regarded as the kickoff to Spring Selling for new home development and construction. Romanowski and Hansen noted the selling season off to a promising start.

Romanowski shares, "we’ve been encouraged by the early spring selling season," signaling not just a hopeful beginning but a testament to solid groundwork and understanding of the market dynamics. It's like they've got the market's pulse under their fingertips, feeling every beat, every rhythm.

Tackling Affordability: A Buyer-Centric Approach

In today’s economic rollercoaster, buying a home feels more like a Herculean task, especially for first-timers. Enter D.R. Horton’s strategy: mortgage buy-downs and closing cost discounts.

Roughly 70% of our buyers in the December quarter received some form of a rate buy-down,” Hansen states, highlighting a direct, impactful approach to affordability. It's not just about making sales; it's about making dreams attainable, making sure homeownership isn't just a fleeting pipedream.

Community Expansion: Building More Than Homes

Growth is on the agenda, but it's not about sprawling aimlessly. D.R. Horton's community count is up, "about 14% in average active selling communities on a year-over-year basis," according to Hansen. This isn’t mere expansion; it’s strategic positioning, ensuring they’re laying foundations in places people are thrilled to call home. It's a clear message: they're not just building houses; they're crafting communities, stitch by meticulous stitch.

Land and Cost: The Art of the Deal

As land costs soar like a hot air balloon with no intention of coming down, D.R. Horton's navigating these financial skies with a keen eye and a steady hand. Romanowski admits, "land itself has remained sticky and price continue to escalate," yet there's no hint of defeat, only determination. It’s a balancing act of acquiring valuable lots without tipping the scales too far on costs, proving that even in the face of rising expenses, strategy can and does triumph.

Outplaying Competition

Regarding the tussle with private homebuilders, D.R. Horton flexes its operational muscles and strategic might. They're not just outbidding; they're outmaneuvering, leveraging scale, operational efficiencies, and a brand strength that turns competition into an opportunity for collaboration. Romanowski's insights into gaining market share, particularly from smaller builders, underscore a relentless pursuit of excellence and expansion, always with an eye on the bigger picture.

M&A: Selective Expansion

In the chess game of mergers and acquisitions, D.R. Horton plays with precision. It’s not about capturing every piece on the board but making moves that strategically enhance their position. Their acquisitions aim to either bolster lot supply or mesh well with their culture and operational ethos, showcasing a disciplined approach to growth that’s as selective as it is smart.

Speeding Through the Build Cycle

Time, in the world of homebuilding, is a currency as valuable as gold. D.R. Horton's quest to shorten the start-to-completion cycle isn't just about efficiency; it's about redefining customer satisfaction and capital turnover. Hansen's revelation that they've managed to bring build times "back down to roughly four months" is a testament to their commitment to not just meet but exceed industry standards.

Navigating Regulatory Challenges

The path to building homes is often littered with regulatory hurdles, but D.R. Horton approaches these with a mix of agility and foresight. Romanowski's candid acknowledgment of the challenges underscores a proactive strategy to turn potential roadblocks into stepping stones, ensuring that every development not only meets but navigates local regulations with finesse.

The Bottom Line

D.R. Horton isn’t just building homes; they’re crafting a future where homeownership is accessible, communities thrive, and growth is envisioned, meticulously planned, and executed. Their strategies, from enhancing affordability to navigating the complexities of land acquisition and regulatory compliance, underscore a company that's not merely reacting to the market but actively shaping it.

In their own words and actions, Romanowski and Hansen paint a picture of a company that's as committed to its customers as it is to its growth, operational efficiency, and market leadership. D.R. Horton's narrative is not just about being America's largest homebuilder; it's about setting a benchmark for the industry, demonstrating that with the right mix of strategic foresight, operational excellence, and a deep understanding of the market and its participants, leading from the front is not just possible but a tangible, achievable reality.

So, as we watch D.R. Horton navigate the ever-evolving landscape of U.S. homebuilding, it's clear they're not just part of the conversation; they're leading it, one carefully laid brick at a time.

Berkshire may be out, but the nation's No. 1 homebuilder's future as an investment bet – for homebuyers, partners, land sellers, and an entire ecosystem of stakeholders – remains rock solid.