All Things in Moderation

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are down.

The Index of Leading Economic Indicators declined 0.1% in December, according to the Conference Board. “The Index fell slightly in December failing to sustain November’s increase,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Low consumer confidence about future business conditions, still relatively weak manufacturing orders, an increase in initial claims for unemployment, and a decline in building permits contributed to the decline. Still, half of the 10 components of the index contributed positively in December. Moreover, the LEI’s six-month and twelve-month growth rates were less negative, signaling fewer headwinds to US economic activity ahead. Nonetheless, we expect growth momentum to remain strong to start the year and US real GDP to expand by 2.3% in 2025.”

The big negative drivers were weak new orders from the ISM report, the slope of the yield curve, and negative consumer confidence. The big positive components were financial: easing credit conditions and the performance of the stock market.

D.R. Horton reported first quarter earnings. Revenues were down YOY as deliveries fell. Gross margins declined as the company is battling affordablity issues by offering mortgage buy-downs. “Although the level of new and existing home inventories has increased from historically low levels, the supply of homes at affordable price points is generally still limited, and demographics supporting housing demand remain favorable. Despite continued affordability challenges and competitive market conditions, incentives such as mortgage rate buydowns have helped to address affordability and spur demand. Additionally, given our focus on affordable product offerings, we have continued to start and sell more of our homes with smaller floor plans to meet homebuyer demand.”

You would think that with such a dearth of starter homes, D.R. Horton would be plowing cash back into the business. It is not. Over the past 12 months it has used all of its operating cash flow buying back stock and paying dividends, despite the fact that the operating business is generating an ROE approaching 20%. As a general rule, if a company expects to earn higher than its cost of capital on the underlying business, it expands the business. If it doesn’t, it should return that capital to shareholders. It is surprising then that DHI is eschewing profitable business opportunities and instead buying back its own stock.

Donald Trump has ordered “emergency relief” on housing affordability, and plans to attack regulatory costs: “Hardworking families today are overwhelmed by the cost of fuel, food, housing, automobiles, medical care, utilities, and insurance. Moreover, many Americans are unable to purchase homes due to historically high prices, in part due to regulatory requirements that alone account for 25 percent of the cost of constructing a new home according to recent analysis.”

I am not sure how much of that 25% is addressable at the Federal level and how much is local building / environmental codes. That said, it is encouraging that the government is taking a look at the issue.

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