Lesson 7 of 8
Reading a homebuilder
D.R. Horton closed 84,863 homes in fiscal 2025 and held 75 percent of its lots under option rather than owning them. That choice is the downside protection.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Backlog is signed revenue not yet recognised, and at a homebuilder it converts within one to three months, so it leads the revenue line by about a quarter.
- D.R. Horton's backlog fell 11 percent to 10,785 homes and 14 percent in value to 4.1 billion dollars at 30 September 2025, while cancellations held at 18 percent of gross sales orders.
- Seventy-five percent of the lots owned and controlled were held through purchase contracts rather than owned, which converts a balance sheet risk into an option premium.
A homebuilder buys land years before it sells a house on it. Everything about the accounts follows from that, and the single most informative disclosure is how much of the land is owned rather than optioned.
D.R. Horton fiscal 2025, against fiscal 2024
| Measure | FY2025 | Change on FY2024 |
|---|---|---|
| Homebuilding revenues | 31.5bn | -7% |
| Homes closed | 84,863 | -5% |
| Average closing price | 370,400 | -2% |
| Net sales orders, homes | 83,423 | -4% |
| Value of net sales orders | 30.8bn | -6% |
| Backlog, homes | 10,785 | -11% |
| Backlog value | 4.1bn | -14% |
| Home sales gross margin | 21.5% | from 23.5% |
Backlog leads, and by how long
Sales order backlog is homes under contract and not yet closed. The filing states that the time between signing a contract and closing is generally one to three months, and that substantially all of the homes in backlog at 30 September 2025 were scheduled to close in fiscal 2026.
So backlog is a short lead indicator here, not a long one. A software company's backlog can describe years; a homebuilder's describes a quarter. It fell 11 percent in units and 14 percent in value, and the average price of a home in backlog fell from 391,700 dollars to 382,000.
It is also not a guarantee. The filing discloses that cancellations were 18 percent of gross sales orders in both fiscal 2025 and fiscal 2024, so roughly one in six contracts signed did not become a closing.
The volume and price split, which is disclosed
Homebuilding revenues fell 7 percent. Homes closed fell 5 percent, to 84,863, and the average closing price fell 2 percent, to 370,400 dollars.
The filing attributes the margin decline to increased sales incentives, including buydowns of mortgage rates for buyers, and home sales gross margin fell from 23.5 percent to 21.5 percent. An incentive of that kind reduces the realised price without showing as a price cut in the list price, which is why the gross margin and the average closing price have to be read together.
The disclosure that decides a downturn
Within the land and lot portfolio, lots controlled through purchase contracts represented 75 percent of the lots owned and controlled at 30 September 2025, against 76 percent a year earlier. And 65 percent of the homes closed in fiscal 2025 were on lots developed by Forestar or a third party, against 63 percent.
An optioned lot is a deposit and a right, not an asset carried at full cost. If demand falls, the option is abandoned and the loss is the deposit. An owned lot is inventory carried on the balance sheet, funded, and impaired when its value falls below carrying value.
The company reports debt to total capital of 19.8 percent against 18.9 percent, and net debt to total capital of 11.0 percent against 5.2 percent. Read together with the option share, that is a description of how much of a downturn would land on the balance sheet rather than on a forfeited deposit.
Check yourself
How far ahead does a homebuilder's backlog lead revenue?
- Three to five years
- About a quarter: the filing states contracts generally close within one to three months of signing
- It does not lead at all
Show the answer
Answer: B.
Substantially all of the homes in backlog at 30 September 2025 were scheduled to close in fiscal 2026, so it is a short indicator rather than a long one.Why do gross margin and average closing price have to be read together?
- Because one is audited and the other is not
- Because incentives such as mortgage rate buydowns reduce the realised economics without appearing as a cut in the closing price
- Because the two are computed on different periods
Show the answer
Answer: B.
The filing attributes the fall in home sales gross margin from 23.5 to 21.5 percent to increased sales incentives, while the average closing price fell only 2 percent.What does holding 75 percent of lots through purchase contracts change?
- The revenue recognised on each home
- What a downturn costs: an abandoned option loses a deposit, while an owned lot is funded inventory that has to be impaired
- The gross margin on each home
Show the answer
Answer: B.
It converts a balance sheet exposure into an option premium, which is why the share held under contract is the most informative land disclosure.Sources
- D.R. Horton, Inc., Form 10-K for the fiscal year ended 30 September 2025, filed 2025-11-19, accession 0000882184-25-000081: homebuilding revenues, homes closed and average closing price, net sales orders, sales order backlog in homes and value, average backlog price, home sales gross margin, cancellation rate, the share of lots controlled through purchase contracts, the share of homes closed on lots developed by Forestar or a third party, the one to three month contract-to-close period, and debt and net debt to total capital.
What this leaves out
- Every figure and percentage change in the table is as the filing reports it. Backlog units and value for fiscal 2024, 12,180 homes and 4.8 billion dollars, are also reported and are quoted in the text.
- The backlog and cancellation figures are as reported. A cancellation rate is a ratio to gross sales orders in the period, not a completion rate for a specific cohort of contracts.
- Nothing here is a view on D.R. Horton or on any security.