KB Homes' Earnings: Homebuilders Lose Again

Includes: KBH, MHO, TOL
by: Adam Alvarez

For those still looking for that long-awaited statistical improvement in the housing market, KB Homes (NYSE:KBH) probably didn't provide the overall numbers you were looking for. Reporting a loss of $0.59 per share or well more than double the $0.24 loss anticipated, shares meandered back down near $10.

Still, the company gave the message of hope all homebuilders have grown accustomed to give. "We expect that the housing market will gradually strengthen as the economy continues to advance," the company said following the release.

However, with an environment that has recently become even more unfavorable for housing companies, even mediocre growth expectations may be underappreciated. Exactly why KB Homes' stock dropped over 8% following the report.

The problems for housing now goes far beyond the basics such as unemployment or foreclosures. They now include rising mortgage rates which are sure to create an astronomical headwind for homebuilders going forward. In the past, rising mortgage rates often signaled strength in the housing market. However, with the latest report by KB Homes, the increase in rates is more attributable to what many classify as an improving economy - an improvement in which homebuilders and home sales are left behind.

"We will definitely see a freeze up in refinances immediately but the decision on a purchase still won't be impacted until rates get at least to 4.5 percent I believe," said Peter Boockvar at Miller Tabak. "Assuming a $200k mortgage, going from 4 to 4.5 percent in mortgage rate adds about $60 per month to one's payments, and while an extra $700 per year matters, I'm not sure if it's a deal breaker."

Even though it may not be a deal breaker, the rise certainly won't lead to a surge in sales. Although some may be inclined to purchase homes in the coming months before rates go any higher, logic would instead argue if buyers couldn't afford to buy homes at the lower rates, they won't be opening up their wallets now.

If the rise in rates, no matter how mediocre, isn't enough to scare away potential buyers, homebuilders are also left to fend with an environment in which renters are growing in number. In mid-March, Zillow (NASDAQ:Z) released a report showing that median rents increased 3% in 2011. While renting is becoming more and more encouraged, the negatives of home ownership such as upkeep and insurance have undoubtedly come to discourage even those well off financially from taking on the rates and expenses.

These disturbing developments have led to significant sell-offs in homebuilding shares in the last couple weeks as shown below.

Toll Brothers (NYSE:TOL) -6%
M/I Homes (NYSE:MHO) -11%
KB Homes -22%

With a government report Friday also showing home sales slid in Febryary for the second straight month, the renewed pressure on homebuilders and their shares is likely to continue in the coming weeks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , Residential Construction
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