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Millennials and GenZ to ‘fuel incredible demand’ for housing sector: KB Home CEO

Jeffrey Mezger, CEO, chairman, and president of KB Home, joins Yahoo Finance to discuss the homebuilding company’s growth and outlook for the year ahead.

Video Transcript

BRIAN SOZZI: Despite the rising yields over the past month or so, major players in the housing sector have continued to voice optimism on demand for 2021. Homebuilder KB Home is no exception, saying in its earnings report last week that backlog surged 59% to 9,238 homes. Here with us now is KB Home chairman, president, and CEO Jeffrey Mezger.

Jeffrey, good to see you this morning here. So a lot of talk on the street right now-- rising yields might lead to less affordability for homes. Are you seeing any of that play out in your business right now?

JEFFREY MEZGER: We haven't yet, Brian. There's demand that is so strong out there. 30 bips up in mortgage rates really didn't do anything-- very strong buyer and a strong credit profile today.

- And Jeffrey, you saw orders up 23% in your first quarter. You know, can you sustain that kind of momentum? What do you expect for the remainder of the year?

JEFFREY MEZGER: We expect, over the balance of the year, that demand will remain strong. In our business, we have a lot of community openings that are gonna happen over the next four months. So we're positioned to continue to see very strong quarter comps year over year.

BRIAN SOZZI: Jeffrey, who's buying a home right now?

JEFFREY MEZGER: In the first quarter, about 65% were first-time buyers. Our largest cohort is millennials. And if you think about it, the millennial delayed their homebuying decision for many years. They either were living with their parents, they had student debt, they came out of the financial crises, didn't want to buy a home. And all of a sudden, this wave started.

And it actually occurred before the pandemic. We saw it last January and February. But it all got lost in the pandemic and all the news around the pandemic.

But past the millennials, you now have the Gen Zs entering their homebuying years as well. Between those two cohorts, there's 150 million people in the country. It's gonna fuel incredible demand for the next several years, I believe.

BRIAN SOZZI: Jeffrey, is my millennial generation-- rates are still low. You know, I know they've risen, but they are still low. Are they taking on too much house relative to their financials?

JEFFREY MEZGER: That's what's interesting about it, Brian. We're not seeing that today. We shared on our call-- put it in this perspective, our average selling price, about 400,000 across the country. 65% first-time buyer, the average down payment was $50,000. They're putting down about 13%, and the average FICO score was 7.24, which is very strong in particular for first-time buyers-- so strong credit metrics, not having an issue qualifying. People want to be a homeowner.

- And Jeffrey, how are you sort of finding that balance between building costs-- we know some of the input costs for you guys have been going up-- and at the same time, the high demand you're seeing? I know that you mentioned the average selling price, around 400,000, but it was up only 2% last quarter. So do you expect to see any more pricing power going forward?

JEFFREY MEZGER: We certainly are seeing pricing power today. The ASP increase that we had in the quarter was somewhat influenced by where we had made investments a year or two ago, and now the communities are open. So it was more mix related.

On the call, we shared that our ASP for the year will be up mid-single digits this year. And what we've been working hard at-- and we're sensitive to affordability-- is continuing to invest in locations and lot sizes and the size of the product we position to be attainable by the median household income in that submarket.

So as we close out a community and open a community, we're very sensitive to staying affordable to the median household income. And that's how our pricing stays as low as it is. Once the community is open, we definitely are taking price dependent on the market conditions and demand. And today, demand is very strong.

BRIAN SOZZI: Jeffrey Wright, you're-- KB Home is a player in the San Francisco market. We've seen a lot of tech workers-- really, an exodus out of California. What are you seeing in San Francisco?

JEFFREY MEZGER: Well, there's an exodus out of the city. But most of the buyers are going to the suburbs. And it's an opportunity because they can work from home. Instead of living in a small apartment with a very expensive payment, they're able to go out into the suburbs, buy their own home, actually lower their payment, and they may have to go in to work one day a week or two days a week. And they'll take a longer drive for a day or two a week in order to be a homeowner and have a much better quality of life in their own residence.

BRIAN SOZZI: And if they haven't moved outside-- out of the city area of San Francisco-- a lot of tech workers have moved to Austin. What are you seeing in that market? It continues to be a hot-- really, an up-and-coming market for so many in the tech space.

JEFFREY MEZGER: Austin's very strong right now. It's one of the strongest businesses for us today. And there's definitely a lot of price there, in part because people come in and are surprised at how affordable it is relative to the coastal areas.

So we have a bookend here. We're large in Austin, and we're large in California. So we're able to benefit from the move from the urban cores out to the suburbs, where most of our communities are located. And at the same time, if somebody is relocating to Vegas, Phoenix, Denver, San Antonio, Austin, those cities, we have large businesses in all those cities as well. So we're still benefiting even if they relocate.

BRIAN SOZZI: All right, we'll leave it there. KB chairman, president, and CEO Jeffrey Mezger, good to speak with you. Have a good rest of the week.

JEFFREY MEZGER: All right. Thank you, Brian.