And yet, going in early may be the exact tactic that’s contributed to the positive launch of Express. With the exception of Woodlands, Texas–based LGI Homes, few home builders are targeting this segment of the market. That translates into lots of room to grow for Horton, a point that Horton CEO David Auld dryly pointed out on the company’s conference call.
“There’s a lot less competition at that price point,” Auld said.
Early Success
Barclay’s Kim looks at Horton’s early foray into entry-level as anticipatory, a move that has produced positive results thus far, but not so positive that other builders will be on its doorstep anytime soon.
“We characterize it as they were skating to where the puck was going,” says Kim. “And so far, they’ve met with success, but it’s not so much success that their competitors are clamoring to get into the space. If that did happen, you might see a demand problem. But right now, it’s basically just Horton and LGI, so you’ve actually got a pretty healthy relationship. There’s a fairly limited supply of this kind of product out there.”
Apparently, buyers have noticed. Evercore ISI’s East, who has visited several Horton communities in Florida, Texas, and California, says Express’ momentum is real. “We’re seeing strong sales,” he says. “We went down to Tampa, which is not a particularly good market right now, and they were still selling eight to 10 homes a month. In Austin and Houston, in January and February, they were selling close to one a day.”
While that sales momentum in those markets is impressive, the real clincher came in California, where many market watchers have speculated that Horton couldn’t sell Express profitably. “In one of the communities we visited in the Inland Empire, they’ve been able to push prices by 9% in three months. They’re selling two a week,” East says. “These things don’t even have granite countertops in them, and they’re killing it.”
East also attributes Horton’s success to its early move into the space, and the dearth of notable competitors. Perhaps more important, though, is his understanding of why Horton went low in the first place. With its gargantuan size—Horton sells nearly 40 percent more homes than the No. 2 builder Lennar—East says the firm began to get pricing signals within its existing product line in 2013 that told it now was the time to get in.
“One of the reasons Horton did this was because of what they saw in their core communities. When people came in who couldn’t qualify, it wasn’t because they had a bad FICO score. It was because their debt-to-income (DTI) ratios were too high,” East says. “They were simply trying to buy too much house, which is exactly what our own field research showed, too. Even if they had been paying $1,500 in rent at an apartment, the lender didn’t care because of that ratio. So Horton looked at that and decided to bring out this product to hit a price point where DTIs are not a problem.”
In the first quarter, 42% of Horton’s in-house mortgages were FHA and VA company-wide, and borrowers had an average FICO score of 717 with a DTI of 89%.
But whether the company can keep it up—and do it profitably—at this end of the market over the long term remains to be seen.
“Given that you’re probably going to give up 200 basis points of gross margin,” East says, “the question becomes can they get enough velocity to generate the returns they need?” He estimates Horton needs to sell six to eight Express homes per month, per community, to hit its targets, which he thinks the company can do.
“For most builders, the answer would probably be no,” he adds. “But this is what Horton does. They build a good product at that price point and it sells well. The market is coming to them.”
