BlackRock-backed KB Home reported better-than-expected third-quarter earnings and revenue late Wednesday, as the Federal Reserve's rate-hike outlook threw a dour shadow over the housing market.
Homebuilder stocks rallied aggressively through the first half of the year, as rising interest rates slowed sales of existing houses, driving up demand and prices for newly built homes. KB Home stock has surged around 50% in 2023.
The Building-Residential/Commercial industry group ranks a strong No. 14 out of 197 groups tracked by IBD. The 22-stock group collectively advanced about 37% so far in 2023.
BlackRock holds an 11% stake in KB Home, the homebuilder's top institutional investor, according to FactSet. The Los Angeles-based company builds homes on the West Coast, and in the Southwest, Central and Southeast regions of the U.S.
BlackRock: KBH Earnings
Estimates: Wall Street predicted earnings would fall 50% to $1.43 per share with revenue decreasing 20% to $1.47 billion. Analysts expected KBH to deliver 3,151 units with an average price per home of $472,930, down 7% compared to last year's $508,700 average price.
Results: The company reported EPS dropped 37% to $1.80 per share and sales decreased 14% to $1.58 billion. Home deliveries fell 7% to 3,375 in Q3 with an average selling price of $466,300, down 8% vs. 2022.
KB Home stock fell 4.2% to 46.06 Thursday during market trade. On Wednesday, KBH shares pared early gains, falling 0.7% to 48.06.
Chief Executive Officer Jeffrey Mezger said in the earnings release that the year-over-year comparisons "reflect the record results we achieved in the prior-year quarter." Mezger added that the Q3 performance is expected to contribute to a more profitable 2023 "than we had previously anticipated."
"Demand was steady throughout the quarter," Mezger said. "Even though mortgage interest rates rose as the quarter progressed."
"We believe we are well positioned to navigate the potential for shifting housing market conditions." he added.
Looking ahead, KBH predicts full-year housing revenues of approximately $6.31 billion and average selling prices of approximately $481,000. On June 21, KBH topped Wall Street's second-quarter estimates. At the time, the BlackRock-backed homebuilder forecast full-year housing revenue between $5.80 billion-$6.20 billion with an average selling price of around $485,000.
KBH earnings decelerated in recent quarters from a 78% jump in Q3 last year. Revenue gains have also slowed from 26% growth Q3 2022.
On Sept. 15, CFRA analyst Ana Garcia wrote that homebuilders' strong balance sheets are favorably positioned to address affordability concerns, "including a strategy pivot to smaller square footage builds and value-proposition rollouts to incentivize home purchase transactions."
Garcia sees KBH as one of several homebuilder stocks "favorably positioned to benefit from these dynamics."
U.S. Housing Market
During the homebuilder stocks run-up in the first half of 2023, Warren Buffett's Berkshire Hathaway bet on the supply-constrained U.S. housing market. Berkshire reported last month that, during Q2, it opened new positions worth a total of more than $800 million in S&P 500 stocks Lennar, D.R. Horton and NVR.
However, homebuilder stocks have now paused for almost nine weeks. That has left some, like Toll Brothers, NVR and M/I Homes in viable base patterns.
Meanwhile, on Monday Fannie Mae released its forecast that home sales will total 4.8 million in 2023, the lowest annual sales since 2011. Home sales are expected to remain stunted through 2024, with 4.9 million expected, according to Fannie Mae economists.
This comes as the 30-year fixed mortgage edged up to 7.18% last week, according to Freddie Mac, handing homebuyers the highest cost of borrowing since the early 2000s.
The big U.S. picture is that of a long-term housing shortage. The construction of new homes has not kept pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors (NAR). The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
That points to a bullish long-term view for homebuilders. Warren Buffett backed that view with Berkshire's Q2 bets on the U.S. housing market.
BlackRock: The Fed And Interest Rates
On Thursday, the National Association of Realtors (NAR) reported that existing-home sales in August retreated 0.7% to a seasonally adjusted annual rate of 4.04 million. Existing-home sales in August fell 15.3% vs. last year. Meanwhile, the median existing-home sales price climbed 3.9% compared to a year ago to $407,100.
"Home sales have been stable for several months, neither rising nor falling in any meaningful way," NAR Chief Economist Lawrence Yun said in the the release.
"Home prices continue to march higher despite lower home sales," Yun added. "Supply needs to essentially double to moderate home price gains."
Estimates called for a very slight uptick in sales, to an annualized rate of 4.1 million. Meanwhile, New home and pending homes sales data for August are due out next week.
In July, existing-home sales fell 2.2%, down nearly 17% vs. 2022, to a seasonally adjusted annual rate of 4.07 million. New-home sales in July grew following a drop in June, according to Commerce Department data. Sales of new single‐family houses in July were at a seasonally adjusted annual rate of 714,000, up 4.4% compared to June and an increase of 31.5% vs. July 2022.
Prices remained strong and demand steady as high mortgage rates left owners of existing homes holding tight — not wanting to sell and move up into more expensive mortgages. The key determinant of interest rates for mortgages is the federal funds target rate set by the Federal Reserve. This rate determines the overnight lending rate among U.S. banks.
The Fed, attempting to cool rapidly rising inflation, has repeatedly raised its target interest rates since the beginning of 2022. Higher interest and mortgage rates tend to reduce housing demand, which theoretically should help dampen inflation. Higher interest rates also help keep the supply of existing homes low.
On Wednesday, the Fed decided to pause its regimen of interest rate hikes. But Fed Chief Jerome Powell hinted that at least one more rate increase could come before the end of the year. Meanwhile, on Tuesday the Commerce Department announced that housing starts in August came in 11% below July's estimate and 15% down vs. August 2022.
Building permits — a rough gauge of future activity — in August were at a seasonally adjusted annual rate of 1.54 million, nearly 7% above July's but is 2.7% down compared to last year.
KBH stock has an 88 Composite Rating out of 99. The BlackRock-backed stock has a 92 Relative Strength Rating. The EPS Rating is 83 for BlackRock's homebuilder play.
Please follow Kit Norton on X, formerly known as Twitter, @KitNorton for more coverage.
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