• The 11% drop in housing starts in March signals a significant slowdown in the housing market.
• D.R. Horton’s recent earnings miss and lowered guidance underscore the growing challenges in homebuilding. 
• While the company’s stock appears undervalued after its 30% pullback, pressures in the housing market could limit the near-term upside.

Housing starts dropped 11.4% in March, marking the steepest monthly decline in a year. Simply put, housing starts track the number of new homes breaking ground—a vital sign of the housing market’s pulse. This slowdown signals further erosion in the housing market, which could have broader implications for the economy as we indicated in a previous analysis.

Over the past six months, the iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) have both seen considerable declines, with ITB down 24% and XHB off 21%. Once a market standout, the homebuilding sector is now grappling with rising headwinds as the outlook for new home construction weakens.

And the drop in housing starts isn’t happening in isolation—it’s occurring alongside tightening credit. A February report from the KPMG accounting firm revealed banks have been growing more cautious, with “12.5% of banks tightening their lending standards for commercial and industrial loans to large and middle-market firms.” It’s not much better for consumers, with an increasing number of loan rejections for credit cards, autos and mortgages. For housing, this is a serious concern—with reduced access to financing, builders and buyers face increasingly difficult circumstances, making the future of home construction even murkier.

The affect of a cooling housing market is clear in the recent performance of D.R. Horton (DHI), reputedly the nation’s largest homebuilder. In its April 17 earnings report, the company missed both revenue and earnings expectations, reflecting broader sector challenges. Over the last six months, its stock has dropped by about 30%. Let’s dig into the financials and valuation to determine whether this downturn presents an opportunity for investors—or if further challenges lie ahead. 

D.R. Horton’s earnings miss reflects cooling market

D.R. Horton offers a broad range of options in various markets. With its economies of scale, competitive pricing and a diversified portfolio that appeals to a wide spectrum of buyers, the company has earned a sterling reputation. However, like many in the homebuilding sector, the company is acutely vulnerable to macroeconomic shifts, particularly changes in interest rates, which directly affect demand for both new and existing homes. As a result, its performance is closely tied to broader economic trends, making it one of the more cyclical stocks in real estate.

D.R. Horton’s Q1’25 earnings report, releasedApril 17, was a letdown, with both revenue and earnings falling short of expectations. The company posted revenue of $7.73 billion for the first quarter, marking a 15% year-on-year decline and missing analyst estimates, which had been closer to $8 billion. Earnings per share (EPS) also disappointed, coming in at $2.58, below the consensus estimate of $2.65. This underperformance reflects the pressure the company is facing as the housing market softens.

The disappointing results stem from a perfect storm of challenges: Rising mortgage rates, affordability issues and a broad slowdown in homebuilding. And with demand weakening, D.R. Horton’s operating margins dropped to 12.9%, a significant decline from 15.9% last year. That highlights the mounting pressure on margins as costs rise and builders are increasingly forced to offer larger incentives just to sustain sales in an uncertain market.

Looking ahead, D.R. Horton lowered its full-year guidance for fiscal 2025, projecting revenue of $34.05 billion, which is 5.8% below analysts’ expectations and a reduction from its earlier forecast of $36.75 billion. The company also lowered its home closings forecast and now expects to close between 85,000 and 87,000 homes, down from an initial estimate of 90,000 to 92,000. This reflects the weaker-than-expected spring selling season and waning consumer confidence, which have caused potential buyers to hold off on purchasing new homes.

These factors—diminished sales orders and a sharp decline in backlog—make it clear D.R. Horton’s once-strong growth trajectory is now at risk. The company is grappling with a sluggish housing market, where continuing economic uncertainty and affordability challenges continue to dampen demand. As a result, the outlook for its stock is increasingly uncertain, and investors are closely watching how the company responds to mounting pressures and adjusts to the evolving market.

An attractive but risky valuation

After a 30% nosedive in D.R. Horton’s stock price, the company’s valuation is starting to look like a tempting bargain, especially for if you have an eye on the long game. But while the stock is trading at attractive prices compared to both its historical performance and its sector peers, the road ahead remains rocky. The homebuilding giant’s future is tied to the ebbs and flows of the housing market, and with housing starts falling sharply, the company could face further erosion in its earnings. 

Delving into the valuation, D.R. Horton’s forward P/E ratio of 9.4 is well below the sector median of 17.1, which suggests the stock is trading at a fairly steep discount relative to its industry peers. On the price-to-sales (P/S) front, it clocks in at 1.1, just above the sector median of 0.8. While this suggests the stock isn’t exactly a steal, it still points to a reasonably priced opportunity relative to the company’s revenue generation. 

D.R. Horton’s vast market share provides some cushion in a tough market. However, affordability challenges and the slowdown in housing starts could limit the stock’s potential to outperform its competitors in the near term. The company’s price-to-book (P/B) ratio of 1.6, compared to the sector median of 1.9, indicates it’s trading slightly below its book value, which also signals a potential undervaluation. This suggests there’s substantial value embedded in company’s assets, making it an intriguing option for value-focused investors.

Turning to analyst sentiment, the outlook for D.R. Horton is a bit less favorable. Out of the 22 analysts covering the stock, only 10 have rated it as a “buy” or “overweight.” While the average price target of $155 per share—about 27% higher than its current price of $125—implies potential upside, the subdued ratings clearly reflect continuing uncertainties in the housing market. All told, D.R. Horton’s stock is clearly walking a tightrope, meaning investors should weigh the risks before deciding whether to take the plunge.

Takeaways

D.R. Horton’s disappointing Q1’25 earnings report and lowered 2025 guidance have raised serious concern about its ability to sustain growth in a cooling housing market. With revenue dropping 15% year-on-year and operating margins shrinking, it’s clear the company is navigating increasingly turbulent waters. As housing starts continue to weaken and credit conditions tighten, the broader homebuilding sector faces additional challenges that could impede growth.

While D.R. Horton’s valuation looks more attractive after a significant pullback, with a P/E ratio of 9.4 and a P/B ratio of 1.5, the prevailing market conditions suggest the stock may struggle to gain traction in the near term. It may be prudent to wait for further weakness, especially if the stock falls below $100 per share. Alternatively, if the broader economy rebounds and consumer confidence picks up, the company’s shares could become much more attractive. 

Andrew Prochnow, Luckbox analyst-at-large, has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader.

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