DR Horton Reports 40% DROP in Sales (Housing Crash Denial Spreads)

Wow.

DR Horton, the largest home builder in America, just had a brutal earnings report. Sales crashed. Inventory surged. And the outlook for the 2023 Housing Market just became even bleaker.

But despite this major warning, Housing Market Bulls have come out in full force in recent weeks. They've pushed DR Horton's stock price to a 52-Week high even though sales are crashing. Many of these Housing Market Bulls are claiming that the Housing Crash is "over".

In this post I'm going to break down 5 Key Points from DR Horton's Earning Report. What they mean for the US Housing Market in 2023. And how they highlight a worrisome trend of Housing Crash Denial that is going to make the downturn even worse.

Let's get into it.

1) The Buyers have left the Building. 40% Crash in Sales.

DR Horton reported only 13,382 net orders in Q1 2023.

In the previous year they reported 21,522 net orders. Meaning that unit sales declined by a massive -38% YoY. Sales Revenue, which factors in price sold, went down -40% YoY.

These sales figures were back down to pre-pandemic levels. And they could soon fall below pre-pandemic levels.

2) Inventory is Spiking. +700% YoY.

What do you get when you combine a sales collapse with lots of home building? The answer: a pile-up of Inventory.

DR Horton reported that they had 7,100 completed, unsold homes in their inventory stock at the end of the quarter (which ended December 31, 2022). This figure is up a massive +700% YoY from the 1,000 they had completed at the end of 2021.

More impressively - their completed, unsold inventory is now higher than pre-pandemic levels by +25%.

This inventory data challenges the notion that there is still a "Housing Shortage" in America. If there truly was a shortage, why would DR Horton have all this inventory sitting completed and empty?

More on that later in the post.

3) But wait...DR Horton "Beat" Earnings?

The conventional finance media and stock investors had a more positive take on DR Horton's Earning Report. Barron's reported that DR Horton "Earnings Beat Expectations" and that the stock price went up.

This is curious. If sales were down 40%, and unsold inventory spiked, how could DR Horton's earnings report have been a success? And why is their stock still trading at $96/Share, up 90% over the last 5 years?

The answer lies in the lag that exists between when builders report sales and revenue. A sale is reported when a buyer puts down a deposit and goes under contract. But the revenue isn't booked until the closing takes place. Which in many cases can take 6-12 months depending on how long home construction takes to finish.

The result is that DR Horton's reported revenue in Q1 2023 was still at a record high $7.3 Billion. Because today's revenue is based on sales from one year ago. And thus, their stock price also remains near an all-time high.

But the collapsing sales today, along with a dwindling order backlog, is making clear that both closings and revenue are going to crash hard in 2023. And DR Horton's Stock Price along with it.

4) Builder Stock Bubble / Housing Crash Denial

But Investors don't seem to care about these realities. A slew of narratives surrounding a "Housing Shortage" and "Strong Buyer Demand" have convinced many that Home Builders are a good buy even when they're reporting terrible sales figures.

Ultimately this relates to a broader Housing Crash Denial trend that is occurring across institutional finance and real estate. Many are unwilling to acknowledge the harsh realities that the Housing Market faces in 2023. And are ignoring huge warning flags in favor of believing suspect bullish narratives.

To understand these narratives, and the psychology surrounding the Housing Market, take a look at this quote from DR Horton's CEO David Auld.

"There aren't enough lots or houses" is a repetition of the Housing Shortage Narrative. The rest of the sentence is a repetition of the Strong Demand/so Many Millennials want to Buy Narrative.

He's literally saying those things at a time when demand to Buy AND Rent Homes is at the lowest level since 2009.

5) The Bigger the Denial, the Bigger the Crash

Ultimately these false narratives and the ongoing denial of the Housing Crash simply means that the crash will be even worse. The longer that institutional investors in stocks and real estate wait to acknowledge the downturn, the bigger the rush to the door will be when they finally do.

As Michael Burry so eloquently said on Twitter in June 2022: "The theater took more than a decade to overstuff. Not likely everyone gets out in less than a year."

The idea behind is this tweet is that investors were groomed by money printing and low interest rates from 2011 to 2021 to always expect the market to go up. To expect a bailout. To expect the Fed to come to the rescue. To expect continued economic expansion. Simply put: bad things couldn't happen.

This grooming resulted in many new participants piling into the theater of stocks and real estate investing over the last decade. And many of them aren't ready to leave. They're going to spin suspect bullish narratives until things get so bad that they're forced to leave.

DR Horton is a great example of the mentality that currently exists in the Housing Market. I'll be watching their stock price as an anecdotal indicator of Housing Market Sentiment in coming months.

-Nick