Despite fluctuations in demand across the fiscal third quarter due to mortgage rate uncertainty and economic concerns, KB Home posted year-over-year growth in revenues and deliveries during the period.

“”We experienced variability in demand across the quarter, with softening in late June through July, as buyers continue to evaluate elevated mortgage interest rates, and general economic concerns were rising,” KB Home chairman and CEO Jeffrey Mezger said. “As rates moderated in August, our net orders improved. We are encouraged by this strengthening in demand for our affordably price personalized homes, and the ongoing positive trend we are experiencing so far in our fourth quarter.”

While KB Home’s results largely were positive on a year-over-year basis, Wall Street viewed the home builder’s quarterly earnings as “mixed.” Revenues of $1.75 billion, a 10% increase on a year-over-year basis, bested Wall Street estimates by $0.02 billion. While profits ($157.3 million) and profits per share ($2.04) were higher on a year-over-year basis by 5% and 13%, respectively, the third quarter profits per share result missed the Bloomberg consensus estimate of $2.06 per share.

Homes delivered increased 8% on a year-over-year basis to 3,631 in the fiscal third quarter, ended Aug. 31. The average selling price for KB Home increased 3% to $480,900 while net orders were essentially flat at 3,085.

Monthly net orders per community declined slightly to 4.1 from 4.3 in the third quarter of 2023. The home builder’s cancellation rate as a percentage of gross orders improved to 15% from 21% in the year-prior period.

“Although traffic increased 8% year-over-year, some buyers hesitated on their purchase decision due to concerns about transacting too early given the uncertainty around interest rates and news headlines fueling expectation of interest rate cuts by the Federal Reserve,” president and chief operating officer Robert McGibney said during the builder’s earnings call with investors. “Ultimately, lower mortgage rates do help to stimulate demand, and we saw evidence of this in August, with net orders increasing sequentially week by week as the month progressed.”

McGibney said KB Home views the primary motivation for buyers in the current market is finding a home to meet their needs at the best price, not with the biggest incentive or rate buydown. While still offering buydowns, KB Home strategically “selectively adjusted pricing at the community level as needed” in order to stimulate demand and optimize the balance of pace and price. This strategic approach positively impacted net orders in August, McGibney said.

“We began to reduce the dollar amount of mortgage concessions in our net orders in August in conjunction with lower prices and we expect to be able to lower our use of this incentive in the fourth quarter considering improved affordability levels provided by the recent relief [with] mortgage rates,” McGibney said.

KB Home started nearly 3,000 homes in the third quarter and ended the period with over 7,700 homes in production. At quarter’s end, the builder had 5,724 homes in backlog, down from 7,008 homes a year ago. The company’s ending community count grew 10% year-over-year to 254.

The build times on homes delivered in the quarter was approximately 150 days, a two-week improvement on a sequential basis. KB Home reduced the cost for homes started in the quarter—due to improvements in categories such as stucco and lumber—helping offset the impact of pricing changes, incentives, and land costs.

“We are encouraged by the positive trend [in net orders in August] and we continue to see solid sales quarter-to-date in September,” Mezger said. “With the Federal Reserve lowering interest rates by 50 basis points last week, we believe this will further benefit consumer confidence and affordability. Given the soft comparison in the year ago fourth quarter, even normal seasonality will provide a strong year-over-year comparison in our 2024 fourth quarter net orders, setting us up with momentum as we enter the new year.”

Land Strategy

KB Home has invested $2.10 billion in land and land development through the first nine months of the fiscal year, a 59% increase compared to the first nine months of the 2023 fiscal year.

The builder’s lots owned or under contract grew 24% year-over-year to 69,279 in the quarter. Approximately 58% of those lots were owned and the remaining 42% were under contract. For comparison, the builder owned 73% of its lots and had 27% under contract as of Nov. 30, 2023.

“The composition of our land portfolio is strong, aligned with our product and pricing strategy, and provides opportunities for us to gain share in our served markets,” Mezger said. “In addition to growing out established divisions, we are also beginning to see solid growth in our newest markets, Boise and Charlotte, as well as Seattle, which had its first deliveries only five years ago and is already on the cusp of a top three market share exposition.”

Impacts of NAR Settlement

When asked about the impacts of new regulations for Realtors following the National Association of Realtors (NAR) settlement, Mezger and McGibney said the process is “in flux” and is something the builder believes will continue to evolve over time.

“But we are seeing that evolution speed up a little bit now that buyers are required to sign in agreement with the Realtor that defines the terms of the compensation,” McGibney said. “We’ve had some interesting situations in the field over the last couple of months where some buyers had signed agreements and didn’t really know what they had signed up for. And we’ve also had customers come into our sales office and tell us that they chose not to work with the Realtor because they didn’t want to be on the hook for covering that commission.”

McGibney said KB Home continues to value partnerships with Relators and “want to continue cooperating with them and compensating them fairly for it.” He noted that for Q3 orders, KB Home saw Realtor participation was down about 5% sequentially. The builder is unsure if this sequential decline is a direct result of the NAR settlement but McGibney says it is “something that we are going to continue watching closely.”

“But at the same time, it is a pretty significant cost addition to the home and affordability can be tough, and we are focused on removing any extra cost that we can,” McGibney said. “One change that we have in play is now we require the buyer to show us that compensation agreement with their Realtor and we typically pay up to 2%, but not more.”

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