On May 22, Zacks Investment Research downgraded KB Home (KBH) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
KB Home has been shifting focus from first-time buyers to higher-income and more experienced move-up buyers who have greater potential to qualify for home loans. However, given the latest housing data released earlier this month, we believe that this strategic shift may result in unfavorable business in the upcoming quarter.
As per the data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, nationwide housing construction increased 13.2% in Apr 2014, which was mostly driven by increased multifamily starts. Multifamily starts rose in double digits as more and more young people from the rental market turned into first time homebuyers. These young buyers opt for multifamily homes as apartments are more affordable than the single family homes.
However, single-family housing starts were mostly flat. The flattish single-family housing starts in April were due to tight credit conditions and uncertain economic conditions. In fact, tight credit conditions, a volatile job market, a shortage of lots and skilled labor, and rising cost of materials have been acting as headwinds for the housing industry in 2014. In addition, rising interest rates has been slowing down the housing since second half of 2013.
The data further shows that issuance of new building permits, which is an indicator of future home building activity, rose 8.0% in April. The increase in building permits was driven by a 21.8% increase in multifamily permits and 0.3% increase in single family starts.
With the shift in the mix of homebuyers in the market, KB Home which targets more of move-up buyers could be at a losing end. Moreover, growing demand for apartment homes could also act as a headwind for KB Home which has less exposure in multi-family construction. In fact, the company had reported a 2.9% decline in the number of homes delivered in first quarter 2014 due to weak business in the West Coast region.
Investors interested in the homebuilding sector can consider stocks like, Simpson Manufacturing Co., Inc. (SSD), Gafisa S.A. (GFA) and TRI Pointe Homes, Inc. (TPH). While Simpson Manufacturing sports a Zacks Rank #1 (Strong Buy), Gafisa and TRI Pointe Homes hold a Zacks Rank #2 (Buy).