D.R. Horton (DHI) Q4 2025: Incentives Lift 5% Orders as Gross Margin Slides to 20%

2025-10-28 | By EarningsIQ Research

Order growth outpaced a soft housing market as D.R. Horton leaned aggressively on incentives, but gross margin erosion and ASP pressure signaled persistent affordability constraints and a competitive landscape. The company’s disciplined capital allocation and inventory management underpin its volume guidance, yet the outlook hinges on spring demand and cost control. Investors should watch for further margin normalization and incentive trends as DHI navigates a choppy macro and evolving housing cycle.

Summary

• Incentive-Driven Volume: DHI grew net orders 5% by increasing incentives, but margin pressure persisted.
• Inventory and Community Expansion: Lower inventory and double-digit community growth position DHI for volume, not price, leadership.
• Margin Watchpoint: Gross margin normalization and ASP pressure remain central to the 2026 outlook.

Performance Analysis

D.R. Horton delivered solid net sales order growth in Q4, up 5% year over year, despite a housing market marked by affordability constraints and volatile rates. This growth was driven by a combination of higher incentives—most notably mortgage rate buy-downs, with 73% of buyers receiving one—and a disciplined approach to inventory and starts. However, gross margin on home sales fell to 20%, down 180 basis points sequentially, reflecting higher incentives and unusual litigation costs. The average selling price (ASP) declined 3% year over year and remains well below both national new home and existing home averages, underscoring DHI’s focus on affordability.

Inventory management was a clear operational theme: homes in inventory fell 21% year over year, and cycle times improved by one to two weeks, boosting asset efficiency. The company’s average active selling communities rose 13%, and lot positions remain robust at 592,000, with a strategic mix of owned and optioned lots. Rental operations and Four Star, DHI’s lot development arm, contributed meaningfully but were not immune to margin compression. Financial services continued to deliver high pre-tax margins, reflecting a resilient ancillary business model.

• Order Growth from Incentives: Volume gains came at the cost of higher incentives, especially rate buy-downs.
• Gross Margin Headwind: Margin pressure was driven by both incentives and elevated litigation costs, with normalization expected in Q1.
• ASP and Mix Shift: Lower ASPs reflect both smaller average home sizes and a higher mix of affordable product.

While the company’s cash flow and capital returns remain robust, the ability to sustain margins in a price-sensitive market is a central challenge as 2026 begins.

Executive Commentary

Strategic Positioning

1. Incentive-Led Absorptions

DHI’s willingness to deploy elevated incentives, particularly mortgage rate buy-downs, remains a primary lever for driving absorptions in a hesitant demand environment. Management reported that 73% of Q4 buyers received a rate buy-down, with the average mortgage rate in backlog now below 5%. This approach enables DHI to keep volumes up but compresses gross margins, which management expects to remain under pressure as affordability constraints persist.

2. Asset-Light Lot Strategy and Four Star Integration

The company’s lot strategy is increasingly asset-light, with 75% of lots controlled via purchase contracts rather than owned outright. Four Star, DHI’s majority-owned lot developer, supplied nearly half of finished lots acquired in Q4 and is positioned to aggregate market share in lot development. This model enhances capital efficiency and flexibility, but exposes DHI to ongoing lot cost inflation, which increased 8% YoY per square foot and is expected to remain sticky in 2026.

3. Community Count Expansion and Inventory Discipline

DHI’s double-digit growth in community count (+13%) and significant reduction in unsold inventory (-21%) reflect a strategic focus on platform expansion and cycle time improvement. By reducing completed spec homes and improving build-to-close timelines, DHI is positioned to ramp starts as demand materializes, without overextending inventory risk. This operational discipline will be critical as the company targets 86,000–88,000 home closings in 2026.

4. Capital Allocation and Shareholder Returns

Capital return remains central: DHI returned $4.8 billion to shareholders in 2025 through buybacks and dividends, shrinking the share count by 9%. The FY26 buyback guide of $2.5 billion is lower, reflecting a return to normalized cash conversion and a more cautious stance as liquidity and leverage targets are balanced against market uncertainty.

5. Geographic and Product Mix

Order growth was strongest in the South Central region (+11%), while the Southeast lagged due to inventory imbalances in select Florida markets. DHI’s expansion into secondary and tertiary markets continues to provide a buffer against regional volatility, and the company is shifting toward smaller, more affordable homes to meet demand and manage ASP pressure.

Key Considerations

DHI’s Q4 performance highlights the tension between volume growth and margin sustainability in a market where affordability remains the gating factor. Strategic discipline in inventory, community count, and capital allocation underpin the company’s ability to flex with market conditions, but the margin trade-off is clear. Investors must weigh the durability of incentive-driven demand against the risk of further margin compression and ASP declines.

Key Considerations:

• Margin Compression Trade-Off: Aggressive incentives support volume but challenge gross margin stability, especially as lot costs remain sticky.
• Inventory and Cycle Time Gains: Improved cycle times and lower inventory reduce risk, but require precise demand forecasting to avoid undersupplying or overbuilding as conditions shift.
• Capital Allocation Flexibility: Lower guided buybacks signal a more conservative approach to cash deployment in an uncertain macro, with a focus on maintaining liquidity and leverage targets.
• Regional and Product Diversification: Expansion into smaller markets and a shift to smaller, more affordable homes help offset regional softness and broaden the buyer base.
• Rental and Ancillary Businesses: Rental operations and financial services continue to provide high-margin diversification, though rental contributions are expected to be back-half weighted in 2026.

Risks

Persistent affordability constraints, sticky lot costs, and elevated incentives threaten further gross margin erosion if demand remains tepid or competitive pressure intensifies. Regional inventory imbalances, especially in Florida and Texas, add uncertainty to volume and pricing. Macro volatility, especially in rates and job growth, could disrupt spring selling momentum and force further incentive escalation. Investors should monitor for further ASP declines and the sustainability of current incentive levels.

Forward Outlook

For Q1 2026, D.R. Horton guided to:

• Consolidated revenues of $6.3–$6.8 billion
• Home closings of 17,100–17,600
• Home sales gross margin of 20–20.5%
• Pre-tax profit margin of 11.3–11.8%

For full-year 2026, management expects:

• Consolidated revenues of $33.5–$35 billion
• Home closings of 86,000–88,000
• At least $3 billion of operating cash flow
• $2.5 billion in share repurchases, $500 million in dividends

Management cited ongoing affordability constraints, sticky lot costs, and a back-half weighted rental contribution as key factors shaping the outlook. The spring selling season and mortgage rate trends will be decisive in determining incentive levels, margin outcomes, and the ability to meet volume guidance.

• Spring demand and rate environment will set the tone for FY26 margins and volume.
• Cost control, especially in stick-and-brick and land, is a major lever for margin stabilization.

Takeaways

DHI’s Q4 showed that volume can be maintained in a challenging market, but only by sacrificing margin through elevated incentives. The company’s asset-light lot strategy, disciplined inventory management, and capital allocation flexibility provide a strong operational foundation. However, the interplay between incentives, ASP pressure, and cost inflation will define the risk-reward for investors in 2026.

• Volume Resilience Hinges on Incentives: DHI’s ability to drive orders with incentives demonstrates market power, but exposes the model to margin volatility as affordability remains strained.
• Cost and Margin Management Are Pivotal: Sustaining returns in 2026 will depend on offsetting sticky lot costs with construction savings and maintaining discipline on incentives as demand ebbs and flows.
• Spring Season Is a Critical Catalyst: The upcoming selling season and mortgage rate trajectory will determine whether DHI can hold the line on margins or will need to further prioritize volume at the expense of profitability.

Conclusion

D.R. Horton’s Q4 performance underscores the company’s operational discipline and strategic flexibility in a tough housing environment. While order growth and cash returns remain strengths, investors should focus on the evolving balance between volume, margin, and affordability as the new cycle unfolds in 2026.

Industry Read-Through

DHI’s results reinforce a key theme across homebuilding: volume can be defended through incentives, but at the cost of margin compression and ASP decline. The persistent affordability gap and sticky lot costs are industry-wide headwinds, with builders increasingly shifting to smaller homes and asset-light lot strategies. Regional volatility, especially in Sunbelt markets, highlights the need for geographic and product diversification. Competitors will likely follow DHI’s playbook of inventory discipline and incentive-driven absorptions, but margin normalization appears to be the new reality for the sector as the housing cycle resets.

DHI Consumer Discretionary Homebuilding Incentives Gross Margin Affordability Lot Strategy Capital Allocation