Despite being in a "black-out" period in anticipation of the company's 1Q2008 earnings results, KB Home CEO Jeffrey Mezger shined some light Feb. 28 on the company's 2008 sales strategies for investors at the Wachovia Securities Home Building and Building Products Conference in Las Vegas.
Because continued volatility in the housing market has sidelined many potential buyers, Mezger said the company has launched several programs to help buyers feel more confident in the purchase of a new home today.
Leveraging the company's long-standing relationship with mortgage giant Countrywide Home Loans, KB has gone squarely after its bread-and-butter market segment--the first-time home buyer--with the launch of a "Why Rent?" event. Aimed at showing renters that homeownership is tangible, the event brought KB-Countrywide mortgage associates to KB communities to help prospects determine their home buying power.
Moreover, the company has started to offer both price protection and rate lock programs. Calling them "powerful programs to have on the table," Mezger said that the programs are "designed to give buyers the confidence" to purchase a new home. The price protection program secures buyers a lower base price if their KB Home price drops between contract and close; the six-month rate lock allows buyers to take advantage of today's historically low interest rates at minimal cost to the company.
Because KB operates on a built-to-order model, Mezger said that these programs are critical in staving off cancellations, which hit a record 58% in 4Q2007. Although Mezger acknowledged that the rate was elevated when calculated as a percentage of quarterly sales, he argued that KB's true can rate should be examined as a percentage of backlog.
Mezger blamed market dynamics for the cancellation spike, saying competitors' slash-and-burn pricing strategies to move inventory homes caused a lot of the company's buyer fall out. If buyers can get a cheaper home that's move-in ready, buyers will cancel rather than wait for their KB home to be built, he explained. However, Mezger noted that the bulk of the cancellations were happening immediately following the sales contract phase, before any dirt was moved. Once buyers had selected options and the home was started, Mezger said the company's cancellation rate was "typically less than 10%."
In terms of options, Mezger said the company was experiencing good success with its "My Home, My Earth" program, a marketing program that pushes the company's selection of eco-conscious home products offered in its design studios. He pointed to the Orlando division as the poster child for the program. Before the program took off, Mezger said less than 2% of buyers in the division were asking for environmentally conscious products. Now, 75% of buyers show interest in the products, which has led to a 35% increase in "green" product sales.