KB Homes quarterly profits: stuck in a cul-de-sac

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On Friday, KB Homes (KBH), the country's third-largest home builder, reported a second-quarter net loss of $78.4 million, or $1.03 per share. While considerably less than last year's losses of $255.9 million, or $3.30 per share, this was still a devastating report. Most analysts had predicted that KB was on track to lose 63 cents per share. Last week, in fact, Goldman Sachs analysts Stuart Kaiser and John Marshall argued that KB was an "attractive" bet.

It isn't hard to see why KB is having a hard time. Even after cutting expenses by half, the company had a 40 percent drop in revenue. With a backlog of 3,804 homes, the company has estimated revenues of $796.9 million tied up in homes that aren't moving. Meanwhile, the average home price has dropped 4.6 percent to $216,200.

Despite hopeful claims to the contrary, it seems like the new home market still hasn't hit bottom. With one in every 398 homes currently in foreclosure, many markets are flooded with cheap, attractive properties. As if that wasn't enough, tight credit markets and job insecurity mean that even a reported rebound in mortgage applications won't necessarily translate into a crop of new homeowners.

Meanwhile, new home builders like KB are desperately trying to drum up business by offering discounts. For example, Lennar, the nation's third-largest home builder, is offering incentives of $52,600 per home. With the average house selling for $251,000, this represents almost 20 percent of the sales price. It is unclear how long these practices can remain sustainable.

In this context, it appears like home builders are treading water until the banking crisis, the credit crisis, and the unemployment crisis are all solved. Ideally, these solutions would be paired with a wholesale destruction of old housing stock, along the lines of Youngstown, Ohio's painful rubble-raising program. Barring that, a second-best option would involve millions of foreclosed properties being bought up cheaply by lower-income homeowners who, presumably, would then go to purchase homes built by D.R. Horton (DHI) Pulte (PHM), Lennar (LEN), Centex (CTX), KB, or one of the dozens of other home builders whose bread-and-butter lies in a bustling real estate market.

Apart from the obvious, the problem with this forecast is that it assumes that potential home buyers have learned absolutely nothing in the course of the last year. On a fundamental level, a major surge in the real estate market will require that thousands of house-hungry people will be willing to leverage themselves in order to buy huge properties that -- in many cases -- they don't really need. Given the still-unfolding horror of the credit crisis, this seems unlikely.

This isn't to say that there won't be a rebound in the market. Certainly, the rapid hemorrhage of money out of the housing sector has begun to slow, and many housing execs are predicting that we are about to "turn a corner" or that the market has "flattened." However, it will likely be years before the housing market returns to 2007 levels, and it's reasonable to expect that many of today's top home builders won't be around to see the renaissance.


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