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KB Home posts loss as demand tumbles

The builder refocuses on first-time buyers to weather the slump. It issues a grim forecast.

September 28, 2007|Annette Haddad | Times Staff Writer

When Jeffrey Mezger took the helm as KB Home's chief executive 10 months ago, he knew the nation's housing market was facing new challenges. After five years of an astonishing run-up in home prices and sales, the building industry was suddenly in the throes of a nationwide slowdown.

But even he didn't anticipate how quickly demand for his company's products would shrivel because of deep problems in the mortgage market.

"That was really a curveball that compounded the situation," Mezger said in an interview.

On Thursday, the KB Home chief announced that the Los Angeles-based company was posting its third quarterly loss since he was tapped as CEO and issued a grim forecast of what's ahead.

"At this time, we see no signs that the housing market will stabilize and believe it will be some time before a recovery begins," Mezger said.

KB Home, one of the nation's largest builders, reported a third-quarter loss of $35.6 million, or 46 cents a share, compared with a profit of $153.2 million, or $1.90, in the same period a year ago. The loss came despite the sale of its 49% stake in its French operations in the period that ended Aug. 31.

Excluding the sale, the company reported a loss of $478.6 million, or $6.19 a share, from continuing operations. Revenue fell 32% to $1.54 billion.

"The market has continued to remain difficult and we've had to reposition the business, which is never easy," Mezger said. The company in the third quarter cut expenses 31% from a year earlier by slashing overhead and staff.

Mezger has led the company to refocus on its core customer -- the first-time buyer -- and build smaller houses at lower prices. As of the third quarter, 90% of KB's 372 active selling communities had homes priced under $417,000, or within the limits of conforming loans, which are easier to get these days than larger mortgages. The company has also been urging would-be customers to consider government-insured mortgages through the Federal Housing Administration.

That's a slightly different approach from that of some KB rivals, which have slashed prices and offered lucrative incentives to woo buyers and finish building subdivisions. Home builders' discounts in many parts of the country, including Southern California, have undercut prevailing market prices and forced sellers of existing homes to reduce their asking prices.

"We're not diminishing the value of a community, just offering a wider price band in the community," Mezger said. "In the long run, the community is better off as we complete the build-out of the community and not leave vacant lots."

KB Home has also diverged from its peers by striking partnerships with other big companies. Two years ago, the company started building homes designed by domestic diva Martha Stewart. On Wednesday KB announced a collaboration to sell flooring, window coverings, lighting and other interior design features emblazoned with Disney princesses, pirates and other characters.

Still, KB Home has seen its profits and share price deflate along with its publicly traded rivals' as the nation's housing market shifted from sizzle to fizzle. On Tuesday, Lennar Corp., the biggest U.S. builder by revenue, reported a $514-million quarterly loss as revenue sank 44%.

And the supply of homes for sale keeps rising. On Thursday, the Commerce Department reported that the supply of unsold new homes stood at 8.2 months, meaning it would take that long to sell them all if no additional units came on the market. The volume of existing homes for sale is about 10 months' worth nationwide.

"The oversupply of unsold new and resale homes and downward pressure on new-home values has worsened in many of our markets," Mezger said.

In the third quarter, the average selling price of a KB home fell 7%, to $267,700, from a year earlier. On the West Coast, including California, prices fell on average 10% to $442,000.

Mezger and other industry leaders have noted that conditions in the housing market took a turn for the worse in August, as the fallout from rising mortgage defaults triggered tightening in the credit markets, prompting lenders to scale back on loan programs for even the most credit-worthy borrowers.

KB Home saw an increase in customers canceling their contracts in August compared with a year earlier as they balked at changes in financing or couldn't qualify for loans under new lending criteria.

"August definitely rattled the market," he said. "But we will see it stabilize and settle down.

"I can't say when," he added, "but I can tell you what event to watch: when inventory gets back down to more normal levels," which would be a six-month supply.

The company in the recent quarter took pretax charges of $690.1 million and $107.9 million to write down unsold inventory and joint-venture holdings. The write-downs were partially offset by the sale of its French business for $807.2 million.

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