Forestar Group Q3 2025 Earnings Preview: Can Earnings Resilience Outpace Housing Market Headwinds?

The U.S. housing market remains in a precarious position as high mortgage rates, affordability constraints, and slowing demand persist. For Forestar Group (NYSE: FOR), a national leader in residential lot development, the third quarter of fiscal 2025 will test its ability to maintain earnings resilience amid these headwinds. While industry-wide estimates for homebuilder revenue and lot sales have declined, Forestar's robust liquidity, strategic partnership with D.R. Horton, and disciplined capital allocation practices position it to outperform peers. This article examines whether these strengths can offset macroeconomic pressures and deliver value to shareholders.

Liquidity as a Buffer in a Downturn

Forestar's financial position is a critical differentiator. As of March 31, 2025, the company held $792.0 million in liquidity—comprising $174.3 million in unrestricted cash and $617.7 million in available borrowing capacity. This liquidity was bolstered by the issuance of $500 million in 6.50% senior unsecured notes in March 2025, which extended debt maturities and reduced refinancing risks. With no senior note maturities until 2026 and a net debt to total capital ratio of 29.8%, Forestar's balance sheet is among the most conservative in its sector.

Such financial flexibility allows Forestar to navigate volatile demand cycles without sacrificing operational momentum. For instance, the company can fund land development projects selectively, prioritize high-margin opportunities, and avoid overleveraging during downturns. In Q2 2025, despite a 30% decline in net income year-over-year, Forestar maintained a 10.7% return on equity, underscoring its ability to generate returns even in a weaker market.

Strategic Partnership with D.R. Horton: A Competitive Moat

Forestar's partnership with D.R. Horton, the largest U.S. homebuilder by volume, is a cornerstone of its strategy. At March 31, 2025, 19,200 of Forestar's 68,400 owned lots were subject to a right of first offer to D.R. Horton, while 24,700 lots were under contract for future sales. This arrangement ensures a steady revenue stream and reduces exposure to cyclical demand swings.

D.R. Horton's Q1 2025 performance—$7.61 billion in revenue and 22.7% gross margins—highlights the value of this partnership. By aligning with a homebuilder that prioritizes affordability and “pace over price,” Forestar gains access to a resilient customer base. Moreover, D.R. Horton's improved construction cycle times (down 3 weeks year-over-year) and 156.5% backlog conversion rate demonstrate the operational efficiencies enabled by this collaboration.

While critics argue that overreliance on a single customer increases risk, the depth of this partnership—including shared development strategies and cost synergies—mitigates such concerns. For now, D.R. Horton accounts for ~75% of Forestar's lot sales, but the company has made progress in diversifying its customer base, with 910 lots sold to third parties in Q2 2025 (up from 184 in Q2 2024).

Disciplined Capital Allocation: The Long-Term Play

Forestar's capital allocation discipline is another pillar of its resilience. The company focuses on short-duration, fully-entitled projects with strict underwriting criteria, yielding a 15.1% pre-tax profit margin in the trailing twelve months. Its $1.9 billion in planned 2025 land acquisition and development spending reflects a balanced approach—prioritizing affordable lot development while avoiding overcommitment in a high-interest-rate environment.

This strategy is evident in its 640,000-lot pipeline, 76% of which are optioned rather than owned. By minimizing capital tied up in land, Forestar preserves liquidity and reduces downside risk. Its $2.3 billion of contracted future revenue further provides visibility and stability, even as broader market conditions remain uncertain.

Challenges and Risks

Forestar's revised guidance for 15,000–15,500 lot deliveries in 2025 (down from 16,000–16,500) reflects the reality of a slower spring selling season and affordability constraints. However, the company's strong liquidity, contracted revenue, and strategic alignment with D.R. Horton suggest it is better positioned than most to weather the downturn.

Key risks include further deterioration in housing demand, rising interest rates, and potential margin compression if D.R. Horton's pricing flexibility is tested. That said, Forestar's asset-light model and conservative leverage profile provide a buffer against these scenarios.

Investment Implications

For investors, Forestar represents a unique case in the housing sector: a company with strong balance sheet fundamentals and a defensible competitive position, even as industry-wide headwinds persist. While near-term earnings may lag, the company's long-term value proposition—driven by disciplined capital allocation, a robust pipeline, and a symbiotic partnership with D.R. Horton—remains intact.

Investors with a 12–18-month horizon should consider Forestar if they believe in the eventual normalization of housing market conditions or the resilience of affordability-focused strategies. However, those seeking immediate outperformance may need to wait for a clearer inflection point in homebuyer demand.

Conclusion

Forestar Group's Q3 2025 earnings will likely reflect the ongoing challenges of a tough housing market. Yet, its ability to maintain profitability, extend debt maturities, and leverage a strategic partnership with D.R. Horton suggests that its earnings resilience will outpace industry-wide declines. For long-term investors, this is a compelling case of how disciplined capital allocation and structural advantages can create value even in adversity.