MHO - M/I Homes: Customer Dissatisfaction Amidst A Bleak Outlook Poses Major Threat

Summary

• Over the past year, MHO has been trending downward due to the challenging macroeconomic atmosphere of increasing prices and rising interest rates.
• The housing industry has a bleak outlook in the first quarter of 2023.
• I think the company's long-term decline could be fueled by the gloomy view of the industry as a whole and the extreme discontent of its clientele.

Investment Thesis

Before COVID-19 hit, the housing market was one of the best-performing sectors. However, the industry's performance has been deteriorating since the beginning of the pandemic, and by the end of 2022, things were getting even worse due to rising mortgage rates. Soaring inflation has driven up the price of building supplies, hurting the construction industry and driving up home prices.

Since the record-high inflation severely restricted consumers' purchasing power, the high prices lowered demand for homes as people shifted their spending priorities to focus on the necessities of life. Due to these market forces, M/I Homes, Inc. (MHO) has seen its share price decline by 22.30% over the past year. After reviewing the company's Q3 transcript call, it appears that things are getting worse, especially in terms of demand.

Due to the bleak outlook for the industry in Q1 2023 and the widespread dissatisfaction among the company's clientele, I have very low expectations for the company's prospects. I think the negative feedback from customers will impact the company's image and, in turn, its short- and long-term success.

Company Overview

Since its establishment in 1976 , M/I Homes has become one of the leading homebuilders in the United States, with more than 136,700 homes sold. M/I Homes is the primary brand under which the company's residences are advertised and sold. It provides houses ranging in size from 1,000 square feet to 5,500 square feet and in price from roughly $210,000 to $788,000. In certain areas, M/I Homes also constructs attached townhomes. About 15 marketplaces in 11 states are serviced. Title and mortgage banking services are offered through M/I Financial, another wholly-owned subsidiary.

2023 Q1 Housing Trends: The Future Looks Grim

With the calendar having flipped from 2022 to 2023, a new beginning and renewed vigor are possible. In a year when you hope to purchase or sell a home, it's best to keep a wary eye on the future because the housing market fluctuates monthly.

Many people looking to purchase or sell a home do so during the first three months of the year when the market is often at its busiest. The first three months of the year account for 19% of house sales activity, which translates to almost 1 million homes sold. Unfortunately, many potential borrowers still cannot afford mortgages due to high-interest rates. The market could not defrost as predicted because of that. Heather James, a real estate attorney, indicates that purchasers will have more bargaining power at the beginning of 2023. However, homeowners with substantial equity may be less inclined to sell at today's prices and interest rates.

According to Ralph DiBugnara, president of the real estate website Home Qualified, new economic policies are often unveiled to the public within the first few weeks of the year. Take the upcoming January 31 and February 1 Federal Reserve meeting as an example. At this time, it is expected that the central bank will announce plans to raise interest rates once more. DiBugnara adds, "Historically speaking, this is the season of high debt and increased demand for debt restructuring." A burst of refinancings may occur in the first quarter, but that depends on where interest rates end up.

Mortgage rates will likely remain high in early 2023. Fannie Mae estimates 6.5 percent, Freddie Mac 6.6 percent, and the Mortgage Bankers Association 6.2 percent for 30-year fixed mortgages in the first quarter. Compare that to last year's 3.11 percent average.

Source: Bankrate

As interest rates rise, fewer people can afford to purchase a property, causing prices to fall. If the forecasts of industry experts are accurate, dealers may have to decrease prices sooner rather than later. However, Evangelou warns that housing prices in Q1 will continue to be two percentage points higher than last year.

MHO Q3 Statistics: Onset Of A Long-term Slump?

Q3 2022 statistics show that MHO's performance has been responsive to the dynamics of the housing industry in the wake of the industry's challenges. Sales of 1,349 homes were down 31% from the previous quarter's total of 1,964 sales. Their reach shrank by 2% during the quarter compared to the same period a year prior. Their cancellation rate for the third quarter was 17%, and their new contracts dropped by 40% in July, 19% in August, and 35% in September.

The number of new home construction starts dropped by 30% year over year to 1,563 in the third quarter. Despite this drop in new home construction, there were 5,800 homes in the field as of September 30. This is a 10% increase from the 5,300 homes in the field a year before. More than 20% more houses were out there as of June 30 than the year before. This, in my opinion, perfectly encapsulates the extremely low demand for their homes. I anticipate even poorer quarterly performance from the company in light of the grim outlook and negative reviews from the company's customers that I will address below.

Customer Discontentment: Losing Market Share and Reputation

The level of satisfaction shown by one's clientele is a strong indicator of the level of approval felt by one's target audience. Increases in customer retention, lifetime value, and confidence in the brand are all the result of happy customers. While many businesses aim for 100% client satisfaction, MHO consistently falls short. Many customers have complained about the company's deceptive pricing, and others have expressed frustration with the company's procedures, prompting reviewers to reach this conclusion. Astonishingly, it appears the management hasn't bothered to respond to the numerous complaints. There will be a drop in customer loyalty and maybe market share if management does not fix this in my view.

At this point, I don't think the company will be able to recruit new customers because of the negative publicity they've received online; unless those potential customers don't read the evaluations.

Bottom Line

It's important to weigh the potential benefits against the possible drawbacks before making any kind of investment. There are times when taking a chance pays off, but there are also times when I don't think it's worth it. In light of the bleak forecast for the business and the likelihood of rising interest rates, I do not believe this is good news for investors. In addition, the company has been getting overwhelmingly negative feedback from its clients, which I believe will have a chilling effect on its performance. If I had to weigh the dangers and potential rewards of investing in this company, I would probably decide to pull out, as the risks seem overwhelming in comparison to the potential gains.

Conclusion

A year of declining MHO performance can be attributed to the challenging macroeconomic climate of high inflation and rising interest rates. The company's Q3 2022 numbers are evidence of a probable long-term slump, which I believe will be fueled by negative feedback from the company's customers. Since these appraisals coincide with a period of gloom in the industry, the company may never recover from this rut in my opinion, or may have to work very hard to do so.

With consumers as the king and MHO as their palace, it should be no surprise that the king isn't happy and might soon leave, a dangerous eviction!

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