Real Estate

Largest US builder bets on 'bargain' homes

DR Horton announces express homes
DR Horton announces express homes

After chalking up a strong quarter thanks to a focus on higher-end homes, the nation's largest home builder turned the tables Thursday by announcing it will also move into the entry-level market.

"We wouldn't be getting into Express Homes if we didn't think it was the next segment of the market to recover," D.R. Horton CEO Donald Tomnitz said.

D.R. Horton bargain home in Dallas, Texas.
Source: D.R. Horton

The company's new brand, Express Homes, offers properties at $120,000 to $150,000, well below the national median price of a new home, which in March came in at a record $290,000, according to the U.S. Census. Higher prices have been blamed for the steep drop in sales of newly built homes this winter, down 14 percent in March from a year ago.

The product offering, which began in the company's most recent quarter, is concentrated in Texas, Florida and Georgia. There are no options or upgrades on the homes, which instead are offered as a turnkey product. While it is still rolling out the brand this year, it expects to hit "aggressive targets" in 2015.

Sticker shock lowers new home sales
Sticker shock lowers new home sales

D.R. Horton executives said while the demand for these homes exists, the supply does not. Millions of bargain-basement priced homes flooded the market after the housing crash, but the vast majority were swallowed up by all-cash investors, who rehabbed the homes as rentals. That left regular buyers out in the cold. Investor competition for distressed homes pushed prices up quickly in the hardest hit markets, adding yet another barrier to entry for lower-income or first-time buyers, who largely depend on credit.

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While credit has not eased much since it locked up following the financial crisis, D.R. Horton is betting that it will soon, especially with regard to first-time buyers.

"We are going to get some help on the qualification side," said Tomnitz. "As we move into this recovery we'll see some encouragement from the government in terms of trying to get more people into entry-level homes."

D.R. Horton bargain home in Houston.
Source: D.R. Horton

It may seem like a bold move, with other builders, like Pulte Homes, focusing much more on higher-end products, since that's what is selling. But analysts are extolling the move, calling it unique and smart.

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"We view it as the right move," said Stephen East, senior managing director of research firm ISI Group. "Horton's cost structure and operational experience at the entry level makes them one of the few builders that can do this profitably. Also, we are firmly convinced the first-time-buyer segment is getting access to more credit, which will lead to more demand for this low-entry level product."

Horton executives admit they do not see a lot of banking institutions willing to buy lower credit-quality loans. Congress is still mired in debate over reforming the mortgage funding market, and while there are strong proposals in place for getting private capital back in the mix, real action is not expected any time soon.

—By CNBC's Diana Olick.