Homebuilder KB Home (KBH) plans to keep focusing on making homeownership happen for first-time buyers, a winning strategy for the builder during its second quarter.
“Market dynamics are characterized by low existing home inventory and limited availability of new homes at our price points as well as demographics that are particularly favorable for our business, given that we primarily serve the first-time affordable first move-up segments,” KB Home President and CEO Jeffrey T. Mezger said on the earnings call after the market's close Wednesday.
“With respect to demand, buyers are adjusting to higher mortgage rates and the continuation of a more stable rate environment is a positive factor,” he added.
The environment helped boost the builder's second quarter. Adjusted earnings per share came in at $1.94, beating the $1.33 estimate from analysts, according to Bloomberg. Revenue in the quarter totaled $1.77 billion, up from the $1.43 billion expected by analysts.
KB Home said homebuilding revenue amounted to $1.76 billion, up from the $1.43 billion from analysts’ estimates.
With the lack of resale inventory, housing activity is “starting to increase, buyers are demonstrating a higher sense of urgency than we saw earlier this year,” Mezger said.
As a result, net orders jumped 0.6% year-over-year to 3,936, above estimates of 3,363 homes.
The builder’s core strategy of build-to-order has provided stability in deliveries, with 3,666 homes closed during the quarter. This came in about 700 homes higher than its previous guidance, boosted by better build times, fewer cancellations, and improved conversion of unsold inventory.
For the quarter, most of the homes delivered were in the Central and West Coast region.
The homebuilder has pushed through its backlog, down 41% over the last year, reaching 7,286 homes. Regionally, the Southeast and Southwest areas have seen the most improvement in backlog levels compared to a year ago.
California remains sunny
“We believe we are well positioned to leverage our scale and capture the sizable opportunity in our West region, while also continuing to expand across the remainder of our operating footprint,” Mezger said.
The Golden State has been battling an immense shortage of housing despite efforts from lawmakers to jump-start construction. According to an analysis by Fitch Ratings, California has a deficit of 1.4 million affordable and available housing units for households earning at or below 50% of the area's median income.
“For a number of reasons, including a challenging regulatory environment, the state is severely undersupplied and there are not enough new homes built each year to overcome the deficit let alone achieve equilibrium between supply and demand,” Mezger said.
Data from California’s Department of Finance showed the state added homes at a faster clip than any time since 2008 — 123,350 additional units, or an increase of 0.85%.
That’s still not enough as California homebuilders' outlook remains bleak this year amid eroding home affordability and cooling demand, Scott Anderson, chief economist at Bank of the West noted in April.
KB Home, though, isn't shying away from the “highly attractive market opportunity in California.”
“Within the state, our business has become better balanced across our served markets with our inland divisions benefiting from work-from-home trends and affordability, while our coastal price points are now more affordable as we rotated out of most of our $1 million-plus price communities,” Mezger said.
“From a regional standpoint, our West Coast business is now also augmented by our operations in Seattle and Boise, which provide further diversification and growth,” the executive added.
Attractive to buyers
KB Home is staying ahead of the game, enticing a range of buyers.
“We continue to attract buyers above our targeted income levels with healthy credit who can qualify at higher mortgage rates and make a significant down payment,” Mezger said.
While buyers have more choices when picking a mortgage, KB Home's mortgage unit funded 80% of the mortgages on its homes during the second quarter. This comes as mortgage rates sit north of 6%, and KB Home said incentives like rate buy-downs were used “selectively” in the second quarter.
“Our goal is just to offer the best base price that we can and provide transparency on that price. We're primarily using the financing rate buy-downs on an as-needed basis versus artificially inflating the price of the home, so it can be incentivized,” KB Home COO Robert V. McGibney said on the earnings call.
“Many of our buyers understand that they can refinance down the road when and if rates fall, but you can never change the price that you paid for the home.”
KB Home also shaved off about 40 days from its build time. From slab start to completion, it took about seven months in the second quarter, still above the historical level of between four and five months, depending on the division.
"In addition to reducing our cost and the amount of cash we have tied up in our work in progress, faster build time should also help our selling efforts on our personalized homes," McGibney said.
New guidance
For the year, KB Home raised its homebuilding revenue to be in a range of $5.8 billion to $6.2 billion compared with estimates of $5.67 billion, per Bloomberg. The average price of a home is expected to be sold at $485,000, while gross profit is predicted to come in at 21.1%.
The builder anticipates the average community count in the third quarter to be up 10% year over year, but the year-end community count will be flat over 2022. Still, demand remains strong in June, strengthening the homebuilder's projection of home net orders to a range between 3,000 and 3,500 for the third quarter.
“The long-term outlook for the housing market remains healthy,” Mezger said on the earnings call.
Shares of KB Home were down 0.63% during late trading Thursday.
UBS Analyst John Lovallo believes KB Home stock has more room to run higher, propelled by improved housing demand.
"Following KBH FY2Q financial results, it is becoming increasingly clear that not only are the public builders gaining market share from a tight resale market and increasingly strained private competitors, but the overall demand environment is improving," Lovallo wrote in a note to clients following the results.
"This should provide a positive backdrop for the homebuilders in our coverage as we progress through [the second half of 2023] and into 2024," he added.
UBS reiterated its Buy rating for KB Home stock and raised its price target to $65 from $48.
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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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