Despite positive signs, KB Home says no sustained rebound for housing yet

On Friday, BloggingStocks reported on the earnings announcement from Los Angeles, Calif.- based-KB Home (KBH). Following the announcement, CEO Jeffrey Mezger held an earnings conference, painting a relatively dour outlook for his business and his industry.

During the conference call Mezger explained that KB Home was making efforts to manage through the current environment, because he did "not expect a sustained rebound in the overall U.S. housing market in the near-term." Rising unemployment and an unfavorable supply/demand picture from foreclosures, he said, will continue to weigh on KB Home's results. (The company reported that it lost $1.03 in its quarter ending May 31.)


While analysts grilled the executives during the call, Mezger was careful not to say the housing or economic picture had stabilized, only that "in many of our markets, we are seeing a bottom form on price and we are seeing typical sales rates.

That's actually good news. In addition, Mezger's comments indicate that the market is improving. Mezger pointed out that efforts to lower mortgage rates and offer purchasing incentives were helping sales. He also said that prices have come down so much that it in some areas, it now makes more sense to buy rather than rent, as the total cost of home ownership is lower. This is good news for KB Home, which attributes 78% of its backlog to first-time buyers, saying that the potential deals are "pulling people out of apartments."

Homebuilders are getting another boost from California, which has offered a $10,000 tax credit on certain home purchases, one area where KB Home has seen buying volume and pricing power improve in the last few months. This is notable because California was also the source of the majority of the company's writedowns on inventory. While much of KB Home's business in the state is not with buyers eligible for the tax credit, Mezger says that the incentive package is sending a signal to people that home ownership is still a good idea, especially at the prices available now. Where prices are improving, buyers who have been waiting for the bottom are starting to emerge, worried that they'll miss the lowest prices if they wait -- which Mezger said was a "phenomenon... we haven't seen in years."

Another bright spot: the homebuilders' cash flow is improving. As homebuilders minimize purchases of new land and sell off inventory faster than they replace it, they are growing their cash piles. KB Home says it will be cash flow positive for the full year.

For these reasons, despite the poor numbers overall, the slowing pace of losses at KB Home led Credit Suisse to upgrade KB Home from "Underperform" to "Neutral," as Eric Buschemi noted in his Analyst Action Roundup.

James Cullen also edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns KBH, but has no personal position in the stocks mentioned above.


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