KB Home: Why This Homebuilder Will Never Be Great Again

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Lennar housingShares of Lennar (LEN) are hitting highs last seen in 2007 after the homebuilder posted better-than-expected quarterly results this week.

Since bottoming out in October, shares of Lennar, D.R. Horton (DHI), and PulteGroup (PHM) have more than doubled, making real estate development one of the market's hottest sectors over the past six months.

Most homebuilders saw their shares pop higher Tuesday on Lennar's report, but not KB Home (KBH). The company that is apparently becoming the Charlie Brown of developers actually declined slightly on a day when rival developers were having a ball.

Instead of hitting multiyear highs, KB Home has had a March to forget.

Building on a Bad Foundation

Lennar impressed the market this week. Revenue climbed 30%, fueled by a 29% increase in new home delivers. The Miami-based developer posted a better-than-expected profit. Perhaps more importantly, Lennar revealed that new orders -- the pipeline for future revenue growth -- climbed a hearty 33%.

The news contrasts the sorry mess that KB Home reported for the same three months just last week.

KB Home posted a larger quarterly deficit than analysts were expecting. New orders fell by 8%, and the percentage of contracts that were canceled spiked to 36%.

Lennar dazzled. KB frazzled.

KB's report was bad enough to send the stock plunging nearly 20% last week. Don't wait up for KB Home to be invited to the open-house parties being thrown by its profitable and growing peers.

Doesn't Feel Like Home

Things aren't exactly rosy in this problematic industry.

Census data last week showed that new-home sales dropped in February. The National Association of Realtors reported that pending sales were also off last month.

Despite the soft demand, there may be some good news for builders on the pricing front. The S&P/Case-Shiller composite of 20 major metropolitan cities did show that home prices slipped 0.8% in the month of January, slipping 3.8% over the past 12 months -- but some of the more troublesome housing markets during the real estate bubble are actually starting to bounce back.

February was apparently a decent month. One preliminary government report shows that prices for new homes popped 6.1% higher last month, and the National Association of Realtors claims that a 0.3% gain in existing-home prices is the first gain for pre-owned houses since late 2010.

It's against this backdrop that the future promises to throw a few curves. The Federal Reserve is adamant about keeping interest rates low through 2014, but inflation is starting to creep into the picture.

Have you had to pump some gas lately? If so, you've noticed that fuel prices are soaring. This may not be much of a factor to folks trying to sell older houses, but what about KB Home and its building buddies? They need a lot of heavy gear transported, and suddenly the spike in energy costs makes building a home just that much more expensive.

Higher gas prices pose another challenge to residential developers. Since most of the real estate in heavily populated areas has already been developed, homebuilders have to push off deeper into the suburbs to find vacant land to build on. If the pain at the pump intensifies, do you really think potential homebuyers want to face even longer commutes?

Here Comes the Shakeout

Let's say that the perfect balance is struck for home manufacturers. Mortgage rates stay low in an improving economy. The renting craze subsides. After seeing their previous homesteads crumble in value, families actually begin to trust the old American dream of homeownership and buy back in.

It's hard to imagine all of this happening, but let's just say that it does. Are you a buyer of KB Home's stock?

Probably not. There will be a shakeout. There will be fewer developers cashing in on the recovery. You'll see Lennar there, but it's hard to picture KB Home in that snapshot.

Keep in mind that while many homebuilders are returning to or enhancing their profitability, Wall Street sees KB Home posting another hefty loss this year. The profit that analysts were targeting for KB Home for 2013 just three months ago has been more than slashed in half.

The likely outcome here is that we won't get a perfect balance. The economy will improve, but then interest rates will creep higher (driving down home prices since borrowers will get less bang for their leveraged buck). Renters will want to own, but they'll do so in metropolitan areas with plenty of existing properties available.

KB Home's future is torn between merely bad and horrendous. If you have to take a risk and invest in a homebuilder, buy into the ones that are starting to get it right now.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article.



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12 Comments

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Andy Smith

Everyone should run from KB Home as their stock will likely become a bust as the homebuilder is starting to get a lot of bad press in Florida and the story is about to go national. Homes have water intrusion and mold and they are crumbling after being just a few years old. So far there have been over 12 communities that have come forward.

http://thekbhome.com

November 05 2012 at 10:19 PM Report abuse rate up rate down Reply
dwcrete

A local contractor HAS to build with quality in mind, and use reputable subcontractors because he can't afford an in-house attorney.

April 01 2012 at 3:06 PM Report abuse rate up rate down Reply
dwcrete

If you want a recovery then stop buying from mammoth corporations. Buy local and the money stays local.

April 01 2012 at 3:04 PM Report abuse rate up rate down Reply
jcagle9595

Having been a subcontractor for KB Homes, it couldn't happen to a more deserving bunch. To steal a line from "Shawshank Redemption", I thought I'd been f'd by a freight train. And they get class action lawsuits on almost everything they build as well.

March 30 2012 at 12:11 PM Report abuse rate up rate down Reply
TJ

You failed to identify the main problem with K&B. They are based in the State of California. We've crossed the line here. There are more people on the government dole in various forms than producing wealth. And what is the solution of our entrenched Democratic and left leaning Republican leaders, more spending, more controls and, of course, more taxes to pay for it all. I've been an independent businessman my entire life and I promise to never have another business here in California ever again, unless it is physically impossible. [I was a sub-contractor for K&B for about 15 years.]

March 30 2012 at 1:06 AM Report abuse rate up rate down Reply
kml6868

How about an article about why Rick Munarriz will never be great again. It's picking low hanging fruit to take companies when they're down and cite their problems. Why not something with a positive spin to it for a change???

March 29 2012 at 4:50 PM Report abuse rate up rate down Reply
The Dawg

No surprise here. Bought an KB home several years ago and the quality was poor at best. Would not consider them again.

March 29 2012 at 4:27 PM Report abuse +1 rate up rate down Reply
1 reply to The Dawg's comment
KB Home Problems

KB Home will never be great again because I believe they continue to cause self inflicted damage to their reputation and perception through their business practices. We knew someone who purchased a KB Home years ago and although they of course at first would make some excuses or give some runaround, all the problems were always taken care of or he was compensated for them. We purchase a new KB Home in 2010 and the experience has been a nightmare. Definitely feels like a different company from his experience, like they are trying to now eliminate having to perform any warranty repairs of any significance. We also noticed that KB let two their "good" customer service reps go and the so called managers we've had to deal with have been horrible in terms of getting our issue properly resolved. Then they treat you like you're not seeing what you're seeing after you point out their shoddy repair work and give you a hard time about redoing it like it's your fault. Even working our way all the way up to district VP of customer service with KB Home bringing their best crew we still haven't been able to get our issues resolved. We have a lot of other issues as well and KB doesn't really seem to care. I can definitely see KB slipping away for good if it continues to do business this way. If the company wants to be successful it needs to go back to its year 2000 model of rebuilding trust and rebuilding its reputation to improve company perception. For more information visit http://www.kbhomeproblems.com

March 29 2012 at 7:14 PM Report abuse rate up rate down Reply
Brian Brewerz

Thanks to the shaky economy, 30-year fixed loans were recently at a record low of 4.31%. So even if you refinanced two years ago -- when rates were a point higher -- you should run the numbers again, use the refinance calculator at the 123 Refinance

March 29 2012 at 6:16 AM Report abuse rate up rate down Reply
Cate

KB Home will never be good again because they fired all their top agents. Their friends kept their jobs and they fired everyone else and kept the commissions. They deserve to crash.

March 28 2012 at 9:44 PM Report abuse +1 rate up rate down Reply
Somey

When is the next housing bubble going to be?

March 28 2012 at 5:36 PM Report abuse +1 rate up rate down Reply