High Mortgage Rates Saw Cancellations Jump 68% for Homebuilder KB Homes in Q4

Homebuilder KB Homes reported worse than expected fiscal fourth quarter 2022 earnings after the market Wednesday. KBH missed EPS by $0.38 and also missed on revenues. Results were “sharply lower demand stemming from higher mortgage interest rates, inflation and other macroeconomic and geopolitical concerns.” Net orders decreased 80% yr/yr to 692. The company guided FY23 revenue inline. KBH shares were down 2.1% after hours. It has been a difficult time for home buyers and home builders alike with sliding home sales and affordability squeezed with high interest rates and inflation.

Affordability remains the major issue; mortgage demand remains near its lowest level since 1997. Redfin reported pending home sales were down 32% year over year for the four-week period ending January 1. Real estate is experiencing record-low new listings.

kb home

KB Home NYSE: KBH Reported Earnings After Close Wednesday

KB Homes Earnings

Q4 2022 earnings released after 4:10 p.m ET; conference call at 5 p.m. ET

  • KB Home earned $216 million, or $2.47 a share, in the fourth quarter, compared with $174 million, or $1.91 a share, in the year-ago period. Projected EPS was $2.87
  • Revenue rose 16% to $1.94 billion. Projected revenue was $1.99 billion
  • KB Home “large” backlog of more than 7,600 homes, equal to about $3.7 billion in future revenue, supporting its projections for 2023, CEO Mezger said.
  • The number of homes delivered rose 3% to 3,786,
  • Average selling price rose 13% to $510,400
  • Gross orders for the quarter hit 2,169 units, down 47% on-year.
  • Cancellation rates as a percentage of gross orders jumped 68%, compared to 13% a year ago.

Market Reaction

KB Home (KBH) $35.18 -0.76 (-2.11%) After hours

NOTE: KBH earnings come just two days before the two big mortgage lenders report earnings on Friday, Bank pf America and Wells Fargo which will give us, and the Fed a deeper understanding of the economy and the housing market.

Outlook

KB Home guided for first-quarter 2023 housing revenue in a range between $1.25 billion and $1.40 billion, average selling price between $490,000 and $500,000, and profit margins between 20% and 21%.

Market conditions “remain challenging,” Chief Executive Jeffrey Mezger said. “That led the home builder to focus on its backlog of unsold homes and on protecting margins”

KB Home did not deliver a full-year guidance “due to significant uncertainty and limited forward visibility regarding 2023 housing market, macroeconomic and geopolitical conditions,” guiding only for housing revenue in a range of $5 billion to $6 billion for the year.

The CEO also left the door open for possible price cuts.

“Depending on market dynamics and backlog levels in each community, we are getting more aggressive with our pricing ahead of the spring selling season, in order to generate new orders,” Mezger said. KB Home is also looking for cuts in costs and in building time, which would help to offset any impact of lower prices, he said.

Homebuilders Confidence Turns to Despair

US housing starts fell 0.5% month-over-month in November to a seasonally adjusted annual rate of 1.427 million units (consensus 1.395 million), single-unit starts fell even more, by 4.1% to 828,000. Total building permits declined much more than expected 11.2% month-over-month to a seasonally adjusted annual rate of 1.342 million (consensus 1.480 million), with permits for single-unit dwellings dropping by 7.1%. Affordability remains the major issue; mortgage demand remains near its lowest level since 1997.

Mortgage Market Weakness

44% Y/Y drop in ⁦MBA Mortgage⁩ Purchase Index largest decline on record.

“Mortgage credit availability was mostly unchanged in December as mortgage rates remained significantly higher than the prior two years and both refinance and purchase activity slowed dramatically.” MBA’s Joel Kan on the December MCAI

December MCAI

November US existing home sales from the National Association of Realtors fell 7.7% month-over-month in November to a seasonally adjusted annual rate of 4.09 million (consensus 4.20 million) versus an unrevised 4.43 million in October.

That was the tenth straight month that existing home sales have fallen. Total sales in November were down 35.4% from a year ago. Median price growth has slowed meaningfully as higher mortgage rates and inflation has enforced affordability pressures. Total building permits declined much more than expected 11.2% month-over-month.

Lennar Corporation Q4 earnings

Competitor Lennar Corporation reported better than expected Q4 earnings three weeks ago, however forecasted a slowdown in orders for new homes as higher mortgage rates have crushed affordability. LEN said new orders decreased 15% to 13,200 homes; new orders dollar value decreased 24% to $5.5 billion

Big Mortgage Lenders Earnings

Source: KB Homes, TC

Disclosure: I do not hold any positions in the stocks mentioned_

Live From The TradersCommunity Research Desk