Potential New Home Buyers Seem to be Conserving Cash for Necessities

Jan 16, 2023 | Corporate Insights, No Bull Economics


KB Home’s 4Q22 results exemplify the impact of depressed consumer confidence levels as evidenced by a sharp pull-back of potential new home orders from first-time buyers that largely have the financial means to complete the transactions (even with elevated mortgage rates). While KB is working hard not to discount its inventory to drive 1Q23 sales, this pullback certainly will have mid-term implications if confidence levels don’t begin to rebound soon.   

Key Points

  • Management reports that the long-term outlook for the housing market remains favorable. Although existing home inventory has risen recently, there remains an undersupply of resale homes (housing starts are down -40% on an annualized basis), particularly in the $500k price range.
  • In any case, the current housing market continues to be weak in the face of higher mortgage rates, persistent inflationary pressures, and an uncertain economic outlook. KB’s 4Q22 gross orders declined -47% y/y with net orders declining -80% y/y (reflecting an increase in cancellations largely due to economic concerns as opposed to financial constraints).
  • 2022 was a good year for KB with full-year sales increasing +21% y/y (including a +13% increase in average selling price), driving a +2.9% y/y increase in its operating income (15.8% margin) and a +4.7% increase in ROE (to 24.6%).
  • 90% of its deliverable universe closed during 4Q22 and although its 14% cancellation rate on its beginning backlog increased sequentially, it was still below its historical mid-teens average. After peaking in November, cancellations declined in December and is expected to further moderate in January & February.
  • A significantly higher percentage of buyers are locked on their mortgage rates vs. 3Q22 & together with cash buyers represent 80% of KB’s backlog.
  • Through the first 5 weeks of 1Q23, KB’s net orders were down -72% y/y with projections of a -50% to -60% decline for the entire quarter given actions to offer customers with mortgage buy-down points (2-3) and, in some instances, house price discounts in markets with small backlogs.
  • Notably, KB plans to focus on building & delivering its existing backlog during 1Q23 as opposed to following the competitors in their practice of seeking to drive new sales with price discounts.
  • KB is projecting an average selling price of approximately $490,000 to $500,000 during 1Q23, down from $510,000 during 4Q22.
  • The credit profile of buyers using KBHS Home Loans remained strong during 4Q22, with 66% of customers qualifying for a conventional mortgage. The average cash down payment was 17%, which equates to nearly $87,000. The average household income of these buyers was $130,000+ with a 734 FICO score.
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