Guide to Home Building KPIs

This guide highlights the key performance indicators for the home building industry and where investors should look to find an investment edge. While this guide is not a full home building industry primer, as the market leader in granular consensus estimates data, Visible Alpha works with partners and clients to determine the key home building metrics that will aid market participants in identifying home building trends and future performance of home building companies – including Meritage Homes Corporation, D.R. Horton, Century Communities and more.

Guide to Home Building KPIs

This guide highlights the key performance indicators for the home building industry and where investors should look to find an investment edge. While this guide is not a full home building industry primer, as the market leader in granular consensus estimates data, Visible Alpha works with partners and clients to determine the key home building metrics that will aid market participants in identifying home building trends and future performance of home building companies – including Meritage Homes Corporation, Dr. Horton, Century Communities and more.

Industry Overview

The home building industry consists of companies that are primarily engaged in the construction of privately owned homes. These companies build new houses designed for home buyers and include attached and detached single-family residential homes, townhomes and condominiums.

In addition to their home building operations – which typically constitutes the vast majority of their total business – they also provide financial services to their customers, including insurance products, title services and mortgage banking services such as loan originations.

While not a significant portion of overall sales, the revenue generated from land sales fluctuates. Some of the factors that feed into their landholding decisions include business strategy; assessments of existing needs; strength and number of developers and other land buyers; available opportunities to sell land at acceptable prices; market conditions where it is more profitable to sell land than construct. This information is available as a downloadable eBook >

Home Building Business Model

REVENUE

Total overall revenue includes home building revenue and financial services revenue. Home building revenue consists of home revenue and land revenue. The home revenue for a given period is calculated by multiplying the number of homes delivered by the average selling price of those homes.

HOMES DELIVERED, BACKLOG AND NET NEW ORDERS

Homes delivered to customers represent the total number of deliveries of homes to buyers during a specified period. Homes delivered is derived by multiplying the backlog conversion rate times the beginning backlog.

Backlog consists of homes under a purchase contract but not yet delivered to a homebuyer.

The ending backlog represents the number of homes in the backlog from the previous period, plus the number of net orders (new orders for homes less cancellations) generated during the current period, minus the number of homes delivered during the current period.

The backlog at any given time is affected by cancellations, homes delivered and community counts. The backlog value represents potential future housing revenues from homes in the backlog. Finally, the backlog conversion rate is the number of homes delivered in a given period divided by the respective period’s beginning backlog.

Net new orders (new orders for homes less cancellations) are directly affected by community count, where community is defined as a single land development in which new homes are constructed as part of an integrated plan. Community count is the number of communities that are open for sales of homes.

The community development process mainly consists of the following phases:

Acquisition of land
Site planning and design
Development of land into finished lots
Construction and marketing of homes
Delivery of completed homes

The community development process typically takes 6-18 months and depends on various factors like local, state and federal statutes; the process of government approvals and utility service activations; type of offering; the size of the community; financing; availability of construction materials and skilled labor; weather conditions; consumer demand; and economic conditions of the housing industry.

Communities offer various home designs, including single-family detached, condominium-style units, and multiple-story structures or duplexes that vary significantly in size and amenities. Companies typically provide a variety of house floor plans and elevations in each community with interior options and upgrades as well as exterior facades. They also build one to three model homes for each community so that prospective homebuyers can preview the designs and features available.

The absorption rate/contracts per community represent the number of net new home orders divided by the average community for the period. The U.K. market uses different terminology for similar concepts: communities are called sites; net new orders are called private reservations; backlog is referred to as the order book.

LAND

Developable land for the production of homes is a core resource for the business. Companies invest and purchase land in attractive markets that meet their investment return standards. However, they may also periodically sell land parcels to third parties for commercial or other development. When acquiring new land, companies focus on parcels with lots zoned for residential construction. These parcels are either “finished lots,” which are fully developed to start home construction, or partially finished lots.

PRIVATE HOUSING AND AFFORDABLE HOUSING

There are two primary types of houses built in the U.K.: Private housing and affordable/social housing.

Private housing refers to home sales to private owners, whether they are owner-occupied or rented privately. In the U.K., this excludes social housing.

Affordable or social housing consists of homes sold to housing associations that help deliver homes to lower-income residents. Housing associations are established to provide affordable houses on a non-profit basis. Eligible households receive affordable housing based on their income and local house prices. Based on the rent charged, these homes can be broadly classified as:

Social Rented: Target rents defined as per the national rent regime
Affordable Rented: No more than 80% of the local market rent.
Intermediate Housing: Homes for sale or rent provided at a cost above social rent but below local market levels

PROFITABILITY

To evaluate profitability, analysts focus on gross margins, EBIT margins, pre-tax margins and net margins. Gross margins are particularly important due to the industry’s high construction costs. Companies with strong expense management skills have better gross margins.

Key Home Building Metrics

Key performance indicators (KPIs) are the most important business metrics for a particular industry. When understanding market expectations for home building, whether at a company or industry level, here are some of the home building KPIs to consider:

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Home
Home is defined as a single-family residence and includes attached and detached single-family residential homes.
Absorption Rate/Contracts Per Community
Absorption rate is the number of net new home orders divided by average sales locations. In the U.K., contracts per community are also known as sales per site.
Homes Closed/Delivered
Homes closed, or homes delivered, represents the homes delivered to the customers since the project opened.
Average Selling Price (ASP)
Average selling price of the homes delivered, calculated as revenue divided by homes delivered.
Backlog Conversion Rate
Backlog conversion rate represents the number of homes delivered/closed in a given period divided by the backlog at the beginning of the period. The majority of analysts use volume as the base when computing the backlog conversion rate. Alternatively, this can be calculated as realized revenue divided by the backlog.
Cancellation Rate
Cancellation rate of booked homes for the period can be derived as number of canceled units by gross orders.
Net New Orders
Net new orders consist of homes sold under sales contracts minus the cancellation of homes booked for the period. U.K. home builders use the term “reservations” instead of net new orders.
Communities
A community is a single development in which new homes are constructed as part of an integrated plan. Community count denotes the number of communities that have opened for home sales. In the U.K., home builders use the term “sites” rather than communities.
Housing Associations
Housing associations in England are independent societies, bodies of trustees or companies established to provide low-cost social housing on a non-profit-making basis.
Private Housing
The private housing sector or non-social housing sector (i.e., owner-occupied household space and those rented privately), including those that go with a job or business and those not owned by housing associations
Affordable/Social Housing
Affordable housing is social rented, affordable rented and intermediate housing for eligible households, which is determined by local incomes and local house prices. Local authorities and private registered providers own social rented housing.

Visible Alpha’s Standardized Industry Metrics

To understand market expectations for the home building industry, a key information source is sell-side analyst estimate and consensus forecast data. The buy side, sell side and public companies leverage this type of data to conduct peer analysis, a type of analysis conducted by professional analysts that involves comparing standardized metrics of one company with those of similar companies. Because companies report metrics differently – and sometimes report on different metrics altogether – standardizing the key metrics for each company can be a cumbersome process.

Visible Alpha Insights includes analyst data, company data and industry data at level of granularity unparalleled in the market. Our industry data – Standardized Industry Metrics – enables market participants to quantify and compare market expectations for companies across 150+ industries.

Data as of November 2020

Our Home Building Industry Data Set Includes:

Global Tickers

260

Current Analyst Excel Models

280

Unique line items in our standardized operating metrics data

Contributing Brokers

447

Total standardized line items

167

Unique line items in our standardized financials data

Available Comp Tables – Consensus Estimates

Visible Alpha offers 10 home building comp tables, comparing key financial and operating metrics, to make it easy to quickly conduct relative analysis, whether you are interested in looking at key values for Meritage Homes Corporation competitors or global average selling price. Every pre-built comp table is based on region or key operating metrics and is fully customizable.

1 2 3 4 5

Financial and Operating KPIs Available for 31 Home Builders, Including:

AMER

Lennar Corporation (LEN)
Toll Brothers (TOL)
D.R. Horton (DHI)
Meritage Homes (MTH)
KB Home (KBH)

EMEA

Taylor Wimpey (TW)
Barratt Developments (BDEV)
Persimmon (PSN)
Berkeley Group Holdings (BKG)
Bellway (BWY)

APAC

Oberoi Realty Limited (VA: OBER_IN / NSE: OBEROIRLTY)
DLF India (VA: DLFU_IN / NSE: DLF)
Daiwa House Industry (VA: 1925_JP / OTCMKTS: DWAHY)
Sekisui House (VA: 1928_JP / OTCMKTS: SKHSY)
Godrej Properties (VA: GPL_IN / NSE: GODREJPROP)

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Industry KPI Terms & Definitions

Home
Home is defined as a single-family residence and includes attached and detached single-family residential homes.

Absorption Rate/Contracts Per Community
Absorption rate is the number of net new home orders divided by average sales locations. In the U.K., contracts per community are also known as sales per site.

Backlog
Backlog consists of homes sold under sales contracts not yet delivered to customers. U.K. home builders use the term “order book” instead of backlog.

Homes Closed (homes delivered)
Homes closed, or homes delivered, represents the homes delivered to the customers since the project opened.

Average Selling Price
Average selling price of the homes delivered, calculated as revenue divided by homes delivered.

Average Backlog Price
Average backlog price is derived using backlog volume divided by backlog value.

Average Order Price
Average order price using net new orders divided by order value

Backlog Conversion Rate
Backlog conversion rate represents the number of homes delivered/closed in a given period divided by the backlog at the beginning of the period. The majority of analysts use volume as the base when computing the backlog conversion rate. Alternatively, this can be calculated as realized revenue divided by the backlog.

Cancellation Rate
Cancellation rate of booked homes for the period can be derived as number of canceled units by gross orders.

Net New Orders
Net new orders consist of homes sold under sales contracts minus the cancellation of homes booked for the period. U.K. home builders use the term “reservations” instead of net new orders.

Communities/Sites
A community is a single development in which new homes are constructed as part of an integrated plan. Community count denotes the number of communities that have opened for home sales. In the U.K., home builders use the term “sites” rather than communities.

Housing Associations
Housing associations in England are independent societies, bodies of trustees or companies established to provide low-cost social housing on a non-profit-making basis.

Private Housing
The private housing sector or non-social housing sector (i.e., owner-occupied household space and those rented privately), including those that go with a job or business and those not owned by housing associations

Affordable/Social Housing
Affordable housing is social rented, affordable rented and intermediate housing for eligible households, which is determined by local incomes and local house prices. Local authorities and private registered providers own social rented housing.

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