Analyst Explains Why He Downgraded DR Horton (DHI) - 'It's Unfortunate for Builders'

We recently published 10 Stock News You Should Not Miss as Tom Lee Reiterates Bullish Market Outlook Amid AI Catalysts. DR Horton Inc (NYSE:DHI) is one of the stock news you should not miss.

Stephen Kim, Evercore ISI head of housing research, explained in a recent program on CNBC why he downgraded several housing stocks, including DR Horton Inc (NYSE:DHI). The analyst said the US government’s reasoning on the housing problem could negatively impact homebuilders. He said as of now, there is no supply problem.

“A big part of our downgrade was our understanding that the administration was going to aggressively pursue supply-side solutions to affordability, which is really the worst possible thing that the builders could hear. FHFA Director William Pulte has been very clear and increasingly clear in his tweets and interviews about what he’s looking for. The administration seems to believe that we have a national housing deficit because we didn’t build enough homes. The deficit is why home prices are so high and housing has become unaffordable. Higher home prices are also contributing to inflation because the shelter component of CPI is high. They look at the builders and say these builders are deliberately building fewer homes than they could. They’re posting strong profitability and cash flow and buying shares back. They say, if the builders could produce more homes at lower prices, homebuyer affordability gets better, inflation improves, employment will improve, and new home prices can decline, even without dragging down existing home prices, which, by the way, has kind of been happening. There’s a lot of truth in what they say, but it misses something critically important, which I think the builders are really hoping they recognize: we have a demand problem right now. We don’t actually have a supply problem currently. If they had gotten builders to build a lot more three or four years ago, that would have been different, but today you’re slamming the gate shut when the horses already left the barn. We don’t have enough demand, so having the administration focus on supply-side solutions as opposed to mortgage spreads is a problem, and it’s unfortunate for the builders.”

Heartland Mid Cap Value Fund stated the following regarding D.R. Horton, Inc. (NYSE:DHI) in its third quarter 2025 investor letter:

“Consumer Discretionary. Our best-performing holding in the quarter, D.R. Horton, Inc. (NYSE:DHI), came from our Deep Value bucket. The largest homebuilder in the country, DHI enjoys around a 10% market share with scale advantages in a highly fragmented industry.

The company has a particularly strong position in entry-level homes. To produce affordable housing, D.R. Horton runs the business with speculative inventory, meaning it builds homes before buyer contracts are signed. This allows the company to operate the business more like a manufacturer thereby reducing unit costs with most savings passed to the homebuyer. To accommodate this business model, the company’s balance sheet is notably strong, allowing for maximum flexibility in capital allocation. For more than a decade, management pivoted the company’s balance sheet away from owning large swaths of undeveloped land, preferring instead to use less capital-intensive methods to source buildable lots. This self-help strategy reduced the capital commitment to the business and increased returns on investments…” (Click here to read the full text)

While we acknowledge the potential of DHI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an extremely cheap AI stock that is also a major beneficiary of Trump tariffs and onshoring, see our free report on the best short-term AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.