The headline is that 10 homebuilding enterprises deliver more than two out of every five new homes in the U.S., but who's kidding who?

The real story – especially in a suspended animation, "now-is-not-a-good-time-to-buy" backdrop that relegates so many, except the "life happens" home seekers, to the sidelines – is that exactly two homebuilding enterprises, D.R. Horton and Lennar, commanded 24.6% of a total of 665,500 new home closings in 2023 by their lonesome.

What's more, while eight out of 10 of the top homebuilders of 2023 actually ceded marketshare vs. the 2023 annual total closings figure, it was only D.R. Horton and Lennar that gained share – .8% between the two giants – in calendar 2023.

Fact is, especially now, virtually every homebuilding operator in every operating arena in the U.S. is either looking nervously over their shoulder or anxiously at the dust kicked up on the trail ahead at what D.R. Horton or Lennar, or both are doing as they drive their business and operational systems through this stretch of bumps, bruises, questions, and turbulence.

Make no mistake, the issues and anxieties facing most mortal homebuilding operators these days – how far they'll need to go to keep their sales and operational machines running as they await word of an expected adrenaline shot from the Federal Reserve either this month or in September – are only intensified because of the systematic dominance of the industry's two giants.

A turbulent, volatile, uncertain demand market is not the only force making life difficult for 99% of homebuilding operators right now. These two players' well-oiled systems have intruded as part of the trouble. Their gains are at the expense of others' sustenance.

This was evident in the third-quarter earnings call D.R. Horton executives hosted yesterday with Wall Street analysts and investment researchers.

Horton showcased robust financial performance and operational efficiency. Earnings per diluted share increased significantly by 5% to $4.10, and consolidated pre-tax income rose by 1% to $1.8 billion. Revenue increased by 2% to $10 billion, achieving a pre-tax profit margin of 18.1%. The company also generated significant cash flow, with $228 million from consolidated operations and $972 million from homebuilding activities.

Despite the persistent challenges of high inflation and elevated mortgage rates, D.R. Horton remains optimistic about the favorable demographics driving housing demand. The supply of both new and existing homes at affordable price points continues to be limited, supporting homebuyer demand even during the spring selling season. This demand held strong, although affordability challenges persist.

President and CEO Paul Romanowski's emphasis on the balance between price and sales pace to drive returns is a testament to D.R. Horton's strategic leadership, which not only instills confidence in the company's future, but instills fear and angst in many a competing operator, large, medium or small. Romanowski stressed the importance of community-level decision-making in managing inventory and driving returns. Despite the impact of fluctuating interest rates on homebuyer demand and traffic patterns, Horton's adaptive plan and execution route to a consistent end: volume and market share gains.

We continue to balance price and pace to drive the returns that we're looking for community by community," Romanowski says. "We saw choppiness through the quarter in demand as you saw fluctuation in interest rates and we responded accordingly. When rates move, the traffic patterns are impacted and we saw that through the quarter. I think we ended the quarter with better traffic patterns, better demand and felt that coming into July."

The virtuous cycle that Horton and Lennar seem to have succeeded in setting in motion means that since they can essentially determine their production volume, they can also capture and codify the systemic improvements they need to reach to drive greater profitability, even as other competitors struggle – and drop prices, increase incentives, and give up margins – to re-establish a baseline sales pace.

Here's how Jessica Hansen, Senior VP, Investor Relations and Communications, details the interconnective tissue between steady pace and business and operational improvement, resulting in that virtuous cycle:

• On SG&A Improvement:"Our gross profit margin on home sales revenues in the third quarter was 24%, up 80 basis points sequentially from the March quarter. Our gross margin was better than expected, primarily due to lower incentive costs than in the second quarter."
• On Managing SG&A Expenses:"In the third quarter, our home building SG&A expenses increased by 12% from last year, and home building SG&A expense as a percentage of revenues was 7.1%, up 40 basis points from the same quarter in the prior year. We will continue to control our SG&A, while ensuring that our platform adequately supports our business."
• On Lot Costs:"On a per square foot basis, home sales revenues were up 2% and stick and brick costs were down 1% in the quarter, while lot costs increased approximately 2.5%. For the fourth quarter, we expect our home sales gross margin to be similar to the third quarter. Further out, our home sales gross margin will continue to be dependent on the strength of new home demand, changes in mortgage rates, and other market conditions."

Operationally, D.R. Horton has captured improvements, particularly with the normalization of construction cycle times, which enhanced the efficiency of their housing inventory turns. That's the envy of other operators still trying to shave days off their cycle-times. The return on inventory for the trailing 12 months stood at 29.5%, while the return on equity was 21.5%. The company maintained an inventory of 42,600 homes, with 26,200 unsold and 8,800 completed unsold homes.

To address affordability issues, D.R. Horton has implemented several sales incentives, such as mortgage rate buy-downs and price reductions. These incentives are expected to remain at current levels unless there are significant changes in mortgage rates. This strategic use of incentives contributed to a sequential improvement in gross margin on home sales due to lower incentive costs.

D.R. Horton continued to invest heavily in land acquisition and development, committing $2.5 billion during the quarter. This included $1.4 billion for finished lots, $750 million for land development, and $340 million for land acquisition. A substantial portion of homes closed, 64%, were on lots developed by third parties or their majority-owned lot development company, Forestar.

The company's growth strategy also includes a focus on small tuck-in acquisitions to expand its geographic footprint and acquire skilled teams, thereby creating lot-development partners. This approach aims to enhance their market position and operational efficiency.

Regarding market dynamics, D.R. Horton reported a 1% increase in net sales orders, totaling over 23,000 homes with an order value of $8.7 billion. The cancellation rate remained stable at 18%. The average price of net sales orders was $378,900, reflecting the company's strategy to balance price and pace while effectively managing inventory levels.

Looking ahead, D.R. Horton has set optimistic projections for the fourth quarter, expecting consolidated revenues between $10 billion and $10.4 billion and home closings ranging from 24,000 to 24,500. The company aims to maintain a home sales gross margin of around 24% and keep homebuilding SG&A at approximately 7% of revenues. With an anticipated increase in cash flow from operations, D.R. Horton plans to enhance shareholder returns through increased share repurchases and dividends. The company is poised for further market share gains in 2025, driven by efficient capital allocation and a disciplined approach to growth.

With 42,600 homes in inventory and an average selling price of approximately $380,000, we are well-positioned to continue consolidating market share," Romanowski said. "We expect to be positioned to increase our market share further next year. We also expect to generate increased cash flow from operations in fiscal 2025, which we plan to utilize to increase our returns to shareholders through proportionately higher share repurchases and dividends."

The tale of the tape this time next year may or may not show a market share gain among the top 10 U.S. homebuilders. Still, one might reasonably bet that both D.R. Horton and Lennar's marketshare gains will both be in positive territory, come what may. We'll say it so that you'll hear it here first: 25% market share for Horton and Lennar by this time in 2025, and that won't be the end of it.