D.R. Horton (NYSE: DHI) is one the largest homebuilder in the United States with operations in 27 states and 75 metropolitan markets of the United States, primarily under the name of D.R. Horton, America’s Builder. DHI constructs single-family homes, mostly for entry-level and first-time home buyers. DHI also has a small financial services division which provides mortgages and title agency services to homebuyers.
While DHI's national scope can provide it with some protection from regional fluctuations in the U.S. housing market, its focus on middle-income homebuyers makes it particularly exposed to a national housing slump. As a result of a slumping housing market and the exacerbating influence of the subprime lending crisis, the company's revenue and homes closed fell significantly.
In 2009, DHI earned a total of $3.7 billion in total revenues. This was an alarming decline from its 2008 total revenues of $7.7 billion. Despite the decrease in revenues, DHI was able to improve upon its net income situation. Between 2008 and 2009, DHI was able to reduce its net loss from a net loss of $2.6 billion in 2008 to a net loss of $545 million in 2009.
DHI's two primary segments include:
DHI builds and sells homes in 27 states and 83 metropolitan markets of the United States. The company's homes generally range in size from 1,000 to 5,000 square feet and in price from $90,000 to $900,000, with an average closing sales price of approximately $259,200. This segment generally accounts for well over 95% of the company's revenues.
DHI provides mortgage banking and title agency services primarily to homebuyers of D.R. Horton homes. After DHI makes a loan, it generally does not hold on to the loan or service it -- it instead sells the loan to other investors. DHI title company provide title insurance, home examination, and closing services, which are all required during the home purchase process.
Interest rates have several critical effects on the company. In general, rising rates spell bad news for all homebuilders for several reasons:
Homebuilding is a highly cyclical business and is often a beneficiary and victim of business cycles. Demand for homes is dependent upon the strength of the job market, growth in gross and per capita GDP, the level of interest rates and the availability of mortgage financing. When growth is strong, interest rates are low, and employment is robust, potential first time homeowners (DHI's target market) and those wishing to relocate can pursue new homes more affordably. Thus, more people buy homes, which drives the volume and pricing at which the company can sell its home inventory.
As mentioned above, home prices and the level of new home construction are driven by macroeconomic variables like GDP growth, interest rates and employment. In this environment, rising housing prices can lead to lax lending standards and, sometimes, exuberance as collateral values rise, which further fuels price increases. As has happened recently, however, home prices across the country can also experience sharp declines when this exuberance catches up to buyers and lenders. Currently, in part because of a cycle fed by the subprime mortgage crisis, in which mortgage borrowers with poor credit histories or little documentation have struggled to meet payments, home prices in many areas have declined. This, in turn, exacerbates default rates since these borrowers cannot refinance mortgages given deterioration of collateral. Homebuilders such as DHI assume the risk of continued price declines and hampered demand. If home prices stay depressed for extended periods, the company may have to write down the value of its properties or sell them off at losses.
DHI competes against a highly fragmented base of other homebuilders. In most of DHI's markets, it is either the largest or one of the five largest builders.  Some of DHI's major competitors include Lennar (LEN), Pulte Homes (PHM), Centex (CTX), and KB Home (KBH).