Even hard hit Western housing markets are stabilizing—just look at KB Home’s latest cancellation rate

These “strong” incentives, along with house price cuts, appear to be working in the giant homebuilder’s favor: On Wednesday, KB Home reported Q2 cancellation rate 22%. While that’s still a high percentage of buyers who canceled their contracts with KB Home, it’s significantly lower than what it said in January and the 36% it reported in the first quarter of 2023.

“The improvement in (housing) demand that we started to see in February continued throughout the second quarter, as we delivered sequential monthly increases in our net claims,” Mezger told investors on Wednesday. “We are well positioned to meet our 2023 revenue target.”

What’s going on? Two things.

First, the national housing market in the US has stabilized this spring, as existing home inventory and seasonal shortages have created enough to bring the market back into balance.

Second, builders like KB Home have gained an edge over the existing/resale market. During the housing boom pandemic – time with The demand for housing is apparently unlimitedBuilders made buttery profit margins as they quickly raised prices for new homes. These expanded margins became beneficial to builders: as mortgage rates spurred a housing downturn last year, builders like KB Home had an opportunity to reduce margins (i.e. price cuts and/or aggressive price buys) in pursuit of finding the market, or the price that would return. He has a buyer’s request. These price buys now give builders an edge over average Joes trying to sell their homes.

Among publicly traded homebuilders, KB Home has been particularly hard hit by soaring mortgage rates in the past year. The reason is that KB Home’s business is concentrated in the Western and Southwestern housing markets, where a sharp home price correction occurred in the second half of 2022.

In reality, 81% of KB Home’s business They are located either in the southwest (51%) or along the west coast (30%). To make matters worse, KB Home had a high share of business in rapidly correcting markets such as Las Vegas (which makes up 12% of KB Home’s business) and Austin (which makes up 10% of KB Home’s business).

While Austin is still undergoing a home price correction, many western and southwestern markets are finally starting to stabilize. In fact, home prices soared this spring in places like Sacramento and Las Vegas. This stability, of course, helps KB Home.

There is also growing optimism on Wall Street that incentives such as mortgage rate buys will continue to give builders an advantage not only in 2023, but also as long as mortgage rates remain high. After all, not only are builders able to offer incentives, but they also face limited competition since the existing home supply remains tight amid the so-called “lock-in effect” where homeowners refuse to sell and lose out on 2% long term or 3% mortgage rates. Real estate they acquired before interest rates started to rise.

That construction enthusiasm has translated into a rush among investors to buy shares in the homebuilders, including a 60% year-to-date jump in KB Home’s share price. Other major builders have also gained significantly this year, including PulteGroup (+70% year-to-date), Toll Brothers (+50.7% this year), Lennar (+32.2%), and DR Horton (+31.2%). %).

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