Los Angeles-based KB Home reported fourth quarter operating income of $278.2 million, a 30% increase on a year-over-year basis, and an operating income margin of 14.4% in the builder’s fiscal fourth quarter. For the full fiscal year 2022, housing revenues increased by 21% compared with the prior year, and operating margin increased by 350 basis points to 15.1%.

The builder reported a backlog of over 7,600 homes, valued at roughly $3.7 billion, decreases of 27% and 25%, respectively, compared with the same quarter of 2021.

“As we begin 2023, while our backlog has become overextended relative to historical levels due to longer build times, we are committed to reducing our cycle times to achieve deliveries within a more traditional time frame of between six months and seven months from sale to close,” KB Home president and CEO Jeff Mezger said on the company’s quarterly earnings call.

Market conditions, including a combination of cycle time extensions at the latter stages of construction, higher cancellations on homes that were close to or at completion, and challenges related to getting homes and communities energized, contributed to KB Home missing deliveries relative to what was implied in its quarterly guidance. KB Home delivered 3,786 homes in the quarter, a 3% increase on a year-over-year basis.

Mezger said that while the cancellation rate on the company’s beginning backlog “increased sequentially” during the quarter to 14% on 10,756 homes in backlog, it remained below the builder’s historical mid-teen average. Additionally, Mezger said KB Home anticipates a “further moderation” of cancellations in January and February.

“A significantly higher percentage of our buyers are locked on their mortgage rates [at the end of the fourth quarter] as compared to our 2022 third quarter,” Mezger said. “These buyers, together with our buyers who are paying in cash—which also increased slightly sequentially—represent close to 80% of our backlog, giving us confidence in our ability to convert our backlog to closings.”

Despite expecting greater uncertainty in 2023, KB Home projects the long-term outlook for the housing market remains favorable.

“The demographics of the millennials and Gen Zs are advantageous for our business as we primarily serve the first-time and affordable first move-up buyers, market segments traditionally comprised of these large and growing cohorts,” Mezger said. “Although existing home inventory has risen recently, there remains an undersupply of resale homes, particularly at our price points, and with housing starts now down roughly 40% on an annualized basis, the industry is falling further behind in serving the underlying demographic demand.”

Sales Approach
During the earnings call, KB Home said it is employing two sales strategies, depending on how many homes are in the backlog in a community.

“For communities that have large backlogs, particularly those with far more in backlog than remaining to sell, we’re placing more emphasis on our temporary interest rate buydown and lock programs to help product sales and deemphasizing price reductions until more of our backlog is delivered,” chief operating officer Robert McGibney said on the earnings call.

McGibney said while price reductions are the most effective sales tool to generate new orders, lowering base prices in communities may give buyers in backlog expectations they will receive similar reductions regardless of the rate they locked in with their loan.

“It is typically not advantageous for us to lower the base price to a market clearing point in our high backlog communities as the impact to prices of homes that are resold could be significant, particularly in what is traditionally a slower time of year for sales,” McGibney said. “That said, we have adjusted pricing in communities with smaller backlogs, where only a small percentage of that backlog will be impacted.”

Land Strategy
KB Home began pivoting its land strategy in 2022 in response to softening market demand. In the fourth quarter, the builder moderated its investments in land acquisitions and development, with expenditures down 29% on a year-over-year basis. Mezger said the builder canceled contracts to purchase approximately 6,900 lots during the quarter.

“Land acquisitions represented only $68 million of the total fourth quarter investment [in land], a decrease of 74% from the same quarter a year ago,” executive vice president and chief financial officer Jeff Kaminski said on the call. “We also evaluated our transaction pipeline and moved to renegotiate pricing and terms for many deals while abandoning others that no longer met our return thresholds.