DHI Q3 2025: 23,160 Homes Closed, Q4 Gross Margin to Drop 50bps
- Strong operational performance: DHI delivered solid Q3 results with 23,160 homes closed and a home sales gross margin of 21.8%, exceeding their guidance and indicating robust execution even amid challenging market conditions.
- Robust financial strength and capital allocation: The company maintained healthy liquidity with $5.5 billion in consolidated liquidity and expanded its share repurchase authorization to $4.2–$4.4 billion, underscoring disciplined balance sheet management and shareholder return initiatives.
- Resilient demand and buyer quality: Low cancellation rates paired with buyers averaging a FICO score of 720 and strong first-time homebuyer participation support the view that demand fundamentals remain strong despite market headwinds.
- Rising incentive costs compress profitability: Executives noted that to drive sales, incentive levels have been increased—and they expect a 50 basis point decline in gross margin in Q4 due to these rising costs, which could pressure overall margins and earnings.
- Uncertain impact of new tariff measures: Management acknowledged potential impacts from the new Canadian softwood lumber tariff agreement, noting that while the impact is not fully quantified, it could raise construction costs and negatively affect gross margins.
- Worsening buyer credit quality risks: There were indications of a decline in consumer credit metrics—with average buyer FICO scores reportedly dropping by about five points year over year and increasing loan-to-value ratios—which may signal weakening buyer credit profiles and potentially lower housing demand.
| Metric | YoY Change | Reason |
|---|---|---|
Net Income per Diluted Share | -27% | The decline is driven by lower revenues and increased sales incentives that pressured margins, reflecting a continuation of operational adjustments compared to the previous period. |
Consolidated Net Income | -31% | A significant drop in net income is observed due to reduced consumer demand and higher incentive costs as compared to Q2 2024, indicating a challenging market environment. |
Consolidated Revenues | -15% | Revenues fell from $9.1 billion to $7.7 billion as slower new home demand—stemming from affordability issues and declining consumer confidence—impacted performance relative to Q2 2024. |
Home Sales Gross Margin | Decreased to 21.8% | The reduction in margin is linked to increased sales incentives such as mortgage buydowns, an initiative aimed at stimulating sales amid ongoing market uncertainty compared to earlier performance. |
Financial Services Pre-tax Income | -6% | This segment experienced a decline likely due to unfavorable market conditions affecting lending and service operations, mirroring trends observed in previous periods. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Consolidated Revenues | Q4 2025 | $8.4 billion to $8.9 billion | $9,100,000,000 to $9,600,000,000 | raised |
Homes Closed | Q4 2025 | 22,000 to 22,500 homes | 23,500 to 24,000 homes | raised |
Home Sales Gross Margin | Q4 2025 | 21% to 21.5% | 21% to 21.5% | no change |
Consolidated Operating Margin | Q4 2025 | 13.3% to 13.8% | no current guidance | no current guidance |
Consolidated Pre-Tax Profit Margin | Q4 2025 | no prior guidance | 13.6% to 14.1% | no prior guidance |
Consolidated Revenues | FY 2025 | $33.3 billion to $34.8 billion | $33,700,000,000 to $34,200,000,000 | no change |
Homes Closed | FY 2025 | 85,000 to 87,000 homes | 85,000 to 85,500 homes | lowered |
Income Tax Rate | FY 2025 | approximately 24% | approximately 24% | no change |
Share Repurchases | FY 2025 | $4 billion | $4,200,000,000 to $4,400,000,000 | raised |
Dividend Payments | FY 2025 | $500 million | no current guidance | no current guidance |
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Incentives & Margins
Q: How are incentives affecting margins?
A: Management noted that incentives have risen recently to drive strong sales, and they now expect about a 50 basis point decline in gross margin from Q3 to Q4 as a result, balancing volume with margin. -
SG&A & ROE
Q: What guidance for SG&A and balance sheet?
A: They are targeting SG&A in the 7–8% range while maintaining near-100% cash flow conversion in homebuilding and aim for a long-term ROE of about 20% with a stable balance sheet. -
Inventory Management
Q: How is completed inventory being managed?
A: Management is lowering completed inventory by improving cycle times and plans to keep tightening inventory efficiency as they head into fiscal '26, though no specific target was set. -
Cost Trends
Q: How are construction cost trends evolving?
A: Stick and brick costs have fallen about 2% year-over-year, and lot expenses remain in the mid-single digits, reflecting active management amid mix and negotiation effects. -
Pricing Strategy
Q: Are there significant price cuts amid competition?
A: Rather than broad base price reductions, they are using targeted incentives to protect pricing, with selective adjustments when needed by market conditions. -
Broker Relationships
Q: What about third-party broker commissions?
A: They continue to see robust broker support with an attachment rate above 80% and maintain 270 basis points in commissions, integrating these costs into their margin structure. -
Geographic Demand
Q: How are regional demand trends shaping up?
A: Demand remains strong in core markets, with only modest softness noted in areas like the Pacific Northwest, supported by healthy buyer credit quality and a low cancellation rate. -
Canadian Lumber Impact
Q: What is the effect of Canadian lumber tariffs?
A: The impact from Canadian softwood lumber tariffs has not been fully quantified, though management expects any effects to be partly offset by product substitution. -
Community Growth
Q: What is the outlook on community count growth?
A: They anticipate moderation in community expansion, expecting growth to slow into a mid single-digit increase compared to previous double-digit gains. -
Mortgage & Consumer Trends
Q: How are mortgage trends and buyer credit evolving?
A: Average buyer FICO scores have declined slightly as more customers opt for FHA products at 3.99%, but overall credit quality remains strong with minimal cancellation issues.
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