Anticipated Housing Slowdown Showing Up In KB Homes

Lennar (LEN) and Toll Brothers (TOL), who both released massive quarterly results over the past month, we saw KB Home (KBH) follow in their footsteps. KB Home (KBH) delivered its own upside report, easily outpacing Q3 revenue and EPS estimates. As evidenced by a 54 percent increase in new orders for KBH and the limited supply of existing homes on the market, demand for new homes is unquestionably still high. However, as future home affordability becomes a more pressing concern, rising mortgage rates are having a negative impact on KBH and the industry.

On September 20, 2023, KB Home reported Q3 EPS of $1.80 versus the consensus estimate of $1.43. The company reported Q3 revenue of $1.59B versus the consensus estimate of $1.48B.

CEO Jeffrey Mezger said, “We are pleased to report strong financial results for our third quarter, which exceeded our guidance ranges, driven in part by achieving higher deliveries, as we further compressed build times. We generated revenues of approximately $1.6 billion and, together with an operating marginThe operating margin is a critical financial metric that measures a company's ability to generate profit through its core operations. It provides valuable insights into a company's... More of 11.3%, produced diluted earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More of $1.80. While our year-over-year comparisons reflect the record results we achieved in the prior-year quarter, we expect this quarter’s solid performance to contribute to a more profitable 2023 fiscal year than we had previously anticipated. Demand was steady throughout the quarter, leading to a community absorption pace of 4.3 net orders per month, even though mortgage interest rates rose as the quarter progressed. With the choice, flexibility and affordability that our Built to Order model offers to our buyers, we believe we are well positioned to navigate the potential for shifting housing market conditions. We have begun to increase our investment in land acquisition in support of our commitment to grow our community count in 2024 and beyond. Even with this higher investment, the level of operating cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More we are generating enables us to both reinvest in our business and repurchase our common stock, and we expect to continue allocating our capital primarily in these two areas.”

KBH has increased its incentives and concessions to help homebuyers deal with the effects of rising mortgage rates. The average selling price has decreased to $466,300, a decline of 8% year over year, as a result. Additionally, total revenue decreased by 14% year over year, which was the steepest decline in three years.

Earnings must also be declining because margins are shrinking. Despite easily exceeding expectations with an EPS of $1.80, KBH’s EPS was still down 37% year-over-year.

In order to increase affordability and maintain healthy demand, homebuilders are being forced to increase incentives. It’s challenging to see higher mortgage rates as a net benefit because they ultimately reduce margins and profitability through lower average selling prices. Longer term, we do think that KBH and its competitors are in a strong position once the Fed starts lowering rates, which we anticipate will happen sometime around mid-2024.

How the Federal Reserve’s Interest Rate Hikes Impact House Sales

The Federal Reserve (Fed) raising interest rates can have an impact on house sales in several ways:

1. Mortgage rates: When the Fed raises rates, it typically leads to an increase in mortgage rates. Higher mortgage rates make borrowing more expensive for potential homebuyers, reducing their purchasing power. As a result, some potential buyers may delay or reconsider their decision to buy a home, leading to a slowdown in house sales.

2. Affordability: Rising mortgage rates also contribute to reduced affordability for homebuyers. Higher interest rates increase the cost of monthly mortgage payments, making it more challenging for buyers to qualify for loans or afford higher-priced homes. This can lead to a decline in demand and slower house sales.

3. Investor behavior: Higher interest rates can make alternative investments more attractive for investors seeking higher returns. This may divert some investors away from the real estate market, reducing demand for properties, especially in the case of investment properties. Lower demand from investors can impact the overall housing market and potentially slow down house sales.

4. Consumer confidence: Changes in interest rates can influence consumer sentiment and confidence in the economy. If the Fed raises rates to curb inflation or control economic growth, it may be interpreted as a sign of a slowing economy. This can make potential buyers more cautious, leading to decreased confidence in the housing market and a slowdown in house sales.

5. Existing homeowners: Higher interest rates can also impact existing homeowners who may have adjustable-rate mortgages or home equity lines of credit. As their monthly payments increase due to rising rates, they may be less inclined to sell their homes and move, further limiting the supply of available houses for sale.

Overall, the impact of the Federal Reserve raising rates on house sales depends on various factors, including the magnitude of rate increases, market conditions, and consumer sentiment. While rising interest rates can potentially slow down house sales, other factors such as job growth, housing supply, and overall economic conditions also play significant roles in determining the housing market’s performance.

KHB stock has a neutral rating where the balance between Bulls and Bears has made it impossible to determine the technical trend.

KB Home price target lowered at Wedbush

Wedbush maintained an Outperform rating on the shares while lowering the price target for KB Home to $55 from $64 on September 21, 2023. Wedbush claims that KB’s Q3 closings exceeded its projection thanks to shorter cycle times and the shifting of some closings from Q4 to Q3. This pull forward resulted in a Q3 gross marginGross margin is a critical financial metric that plays a pivotal role in evaluating a company's financial health and profitability. It is a percentage that indicates how efficientl... More of 21.5 percent actual versus Wedbush’s estimate of 20.7 percent, but it appears to have a negative effect on Q4’s gross margin as KB forecasts 20.5 percent versus the firm’s prior 21.4 percent. As opposed to the previous prediction of Q3, KB now anticipates that Q4 will be the pivotal quarter for gross margins. KB also anticipates a sequential community count decline from Q3 to Q4 followed by a community count lift beginning in Q2 2024.

KB Home is a homebuilding company that constructs and sells single-family homes, townhomes, and condominiums. The company primarily operates in the United States and focuses on building homes and communities that cater to the needs of various homebuyers, including first-time buyers, move-up buyers, and active adults. KB Home offers a range of floor plans and design options to provide personalized homes to its customers. The company also emphasizes energy efficiency and sustainability in its home construction, aiming to deliver environmentally friendly and cost-effective homes. Additionally, KB Home provides mortgage banking services to assist homebuyers in securing financing for their new homes.