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KB Home results hint market is improving

February 14, 2007|Annette Haddad | Times Staff Writer

KB Home on Tuesday gave the latest evidence that the housing downturn may be easing, reporting improving cancellation rates as well as rebounding sales on the West and East coasts.

The Westwood-based company became the second major home builder in two weeks to report encouraging sales and cancellation trends, following Irvine-based Standard Pacific Corp.

KB, the fifth-biggest U.S. builder by revenue, also posted a better-than-expected quarterly loss, perking up its stock price.

But the improvement is coming at the expense of profit margins. KB Home and other builders find they must keep lowering prices and offer other discounts to snag buyers.

"If you can get to the price point in any market, there is underlying demand," KB Home Chief Executive Jeffrey T. Mezger said during a conference call. He noted that at a KB project in Corona last month, buyers were lining up to purchase homes that were selling for about $400,000, which is more compatible with local household incomes.

Mezger downplayed concerns that tightening of mortgage underwriting standards and the decreased availability of no-money-down home loans would significantly affect KB Home's business. The company caters to the entry-level and first-time move-up homeowner.

KB Home said that so far into its fiscal first quarter, which ends Feb. 28, orders for new homes had fallen just 10% from a year ago. Also, the rate at which buyers are canceling orders has "returned to more normalized levels" of 20% to 30%, compared with more than 40% a year ago.

By contrast, orders in the fourth-quarter fell 38% to 6,059 and the fourth-quarter cancellation rate was 48%, up from 31% a year earlier but down from the third-quarter rate of 53%.

Many buyers have gotten cold feet and canceled orders because they have seen home prices fall while waiting for their new homes to be constructed.

This month, Standard Pacific reported similar rebounding first-quarter trends, noting specifically that Southern California sales in January were up 47% over the year-earlier month. KB Home didn't provide specific first-quarter sales data, other than saying sales were positive on the West and East coasts compared with a year ago.

However, Daniel Oppenheim, an analyst with Banc of America Securities, said that despite the upbeat trends, "conditions have not yet stabilized" because the company has yet "to find a floor on pricing." He maintained his "neutral" rating on KB Home stock.

KB Home executives acknowledge that they face continuing pricing pressure because of excess supply of new and existing homes on the market as the spring home-selling season gets underway. The company said it expected the first half of the year to continue to be challenging.

"It's unclear at this point how strong the spring selling season is going to be," Mezger said.

In its fiscal fourth quarter ended Nov. 30, KB Home reported a net loss of $49.6 million, or 64 cents a share, contrasted with a profit of $304.4 million, or $3.44, a year earlier.

The loss reflected previously announced land and inventory charges of $343.3 million. Some analysts had expected a per-share loss of $1.14. Revenue rose 13% to $3.55 billion.

KB's stock rose $1.49 to $53.43.

KB Home's results were the first to be released since the company became entangled in a stock option backdating scandal that prompted the ouster in November of long-time CEO Bruce Karatz and restatement of certain financial results. The Securities and Exchange Commission is probing KB's stock option grant practices.

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