One of the leading homebuilding companies in the U.S., KB Home (KBH) recently stated that it has observed a marked increase in the average square footage of its new homes that have been purchased in the Sacramento area over the last two fiscal years. The increase in the size of homes is attributable to the change in consumer preference toward larger homes, given the low mortgage rates.
Consumers tend to opt for larger floor spaces instead of smaller floor plans as there is a nominal price difference between the two. Also, lower mortgage rates translate into lower monthly repayments.
Owing to its operational business model KBnxt, KB Home always begins construction only after a purchase agreement is executed. As such, the consumers get the liberty to plan their homes according to their preference.
This process also helps the company turn over its inventory more quickly than its peers, thereby supplying capital for reinvestment. In the long run, this reduces the risk of unsold inventory, leading to higher returns on invested capital.
The company has been intending to make a strategic shift in its geographic footprint. The focus is to place the communities in highly desirable land-constrained submarkets that enable it to sell larger, higher-priced homes, thus driving a strong increase in average selling price. The present increase in demand for larger floor space will also contribute to the average selling price of homes.
A peer of DR Horton Inc. (DHI), KB Home expects fourth quarter revenue to increase 35% sequentially, owing to higher average selling price and better backlog conversion rate. The Zacks Consensus Estimate is pegged at $569 million for the fourth quarter 2012, up 26% from the prior-year quarter.
We currently have a Neutral recommendation on KB Home. The stock carries a Zacks #2 Rank (a short-term Buy rating).
We believe that the housing market is slowly stabilizing with an increase in employment rates and higher consumer confidence. We appreciate the company’s strategic initiatives like land investments in higher priced and better located communities. However, we are aware that the market is still experiencing uneven recovery and the company may have to wait for some time before it achieves profitability.
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