The National Association of Homebuilders (NAHB) released a study that concludes that 63 million households cannot afford a home that costs more than $250,000. Given that there are roughly 129 million households in the US to begin with, that is an eye-popping statistic. Is this really true? And what does it mean for homebuilders like D.R. Horton (DHI -2.42%), especially those that concentrate on the lower-priced homes?
What makes a home affordable?
The NAHB study was given quite a bit of attention in the press, but that number is probably inflated. The study defined "affordable" as a payment less than 28% of income. This includes the principal and interest, taxes, and insurance. The Consumer Financial Protection Bureau (which is in charge of making sure borrowers don't bite off more than they can chew) defines "affordable" as a payment less than 43% of income, and under some circumstances it can go as high as 50%. The 28% number is more of a historical rule of thumb.
Image source: Getty Images.
What are the most common price points currently?
That said, $250,000 is not an expensive house. Based on December data, the Census Bureau reported the median sales price of a new home was $331,400. The average sales price was quite a bit higher, at $384,000. The census report also breaks down the production into price buckets. 90% of all new homes in December cost more than $200,000, and 57% cost more than $300,000. The National Association of Realtors (NAR) estimated the median home price to be $274,500 in December. This number includes new and existing homes, so it is lower than the census data, which looks only at new homes.
Why is supply so constrained?
While many young adults are burdened by student loan debt that can affect the ability to afford a house, the lack of homes at the lower price points seems to indicate something is wrong. Affordability should be easier, given that mortgage rates are the dramatically lower than they were 10 or 20 years ago. Ultimately it comes down to a supply issue. In the immediate aftermath of the financial crisis, much of the foreclosed inventory was taken up by professional investors, like American Homes 4 Rent (AMH -2.46%), which rented them out. This pulled supply off the market, which stabilized prices in the near term and created the circumstances for bidding wars recently. Labor shortages have bedeviled the construction industry as well, along with regulatory issues.
Why D.R. Horton is best positioned to address the shortage
Image source: D.R. Horton.
D.R Horton has some of the lowest average selling prices of the publicly traded homebuilders. While diversified across all segments, the average selling price in the last quarter was $300,900. In comparison, Lennar's average selling price was $400,000, Pulte's was $427,000, and KB Home's was $380,000. While pretty much every builder is now targeting the entry-level buyer (even Toll Brothers), according to the latest investor presentation, 42% of D.R. Horton's sales are below that $250,000 price point. This means the company is addressing the segment where demand is most acute, and from all appearances it has little competition. D.R. Horton is trading at 11.8 times estimated 2020 earnings, which makes it a value stock with some growth upside.
