KB Home 3Q16 Earnings Call Notes

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KB Home’s (KBH) CEO Jeff Mezger on Q3 2016 Results

California reflects ongoing strength along the cost

“The dynamics of the California real estate market continue to reflect ongoing strength along the coast, with rising prices in those areas driving higher demand to the inland areas as buyers seek affordable alternatives. California is a large and diverse economy, one that is showing an accelerating recovery”

Houston market stabilized

“In Houston, as we discussed, we pulled back on our investment in early 2015 until we had more clarity on the impact on demand from falling oil prices, and our community count is now lower as a result. We are now seeing the market stabilize with demand solid at price points below $250,000. We are well-positioned today in Houston with an average selling price of about $230,000 and our net order growth for the quarter returned to positive territory in spite of fewer opened communities.”

Interest rates low and credit availability is expanding

“Economic indicators continue to show general improvement and we remain encouraged by the housing market’s steady recovery. Interest rates remain low and credit availability is expanding, contributing to healthy demand. And with existing home inventory limited and new home starts well below normalized levels, the new home industry is positioned to benefit for the foreseeable future.”

We are seeing strengthening demand in the B submarkets

” we are seeing strengthening demand in what I’ll call the B submarkets. We’re really not looking at the Cs yet, don’t know that we ever will, as long as there’s opportunity in the B. So we’re, within each city, we have a strategy. We’ll target the median income and that submarket. We try to get to the most desirable submarkets with the best balance of demand supply and a median income that can get a mortgage, and that’s where we’ll spend our attention. So we hug the coast in California but we are seeing more business in the inland areas as they recover.”

Biggest order growth areas in inland empire and central cal

” our two biggest order growth areas were Inland Empire and Central Cal. So the inland area is the more affordable place, typically more first time buyer or more affordable first move-up demand in those regions, and that’s what we’re seeing. It’s also where we, in a year ago, had more what I’ll call underperforming communities, whether reactivations or things that just weren’t working that well. So we’re, if you want to say there’s a mix shift going on, I think there is because we’re holding our business in the coastal zones of California, and lifting it inland.”

Underwriting standards continue to migrate towards normal

“Well, if you look at credit profiles of Fannie Mae bonds being sold, the FICO score continues to move down a little bit. So you’re seeing they’re still well above the regulations and guidelines but they are coming down from where they were a year ago or certainly two or three years ago. I think as more submarkets get into a position where more of the homeowners and loans have equity, that the banks are feeling more comfortable in getting back to more normalized underwriting as well. But I would start by looking at the Fannie and Freddie bonds that are being sold because the credit profile is migrating more towards normal underwriting.”

Not going to talk about this quarter yet but solid demand in the last quarter

“The color on the quarter that just finished is pretty consistent through the quarter. We saw solid demand, we saw good traffic levels. And as you could tell by our comments, across the Company, our sales per community were better than they were a year ago. So it’s encouraging, but we’ll speak to the fourth quarter later this year.”

Jeff Kaminski

Very tight labor conditions across the country

Right. What we’re seeing across most of the markets, there’s been very tight labor conditions across the country in most of the markets, particularly in framing labor category and dry wall I guess secondarily. And as the demand ticks up for those services, as we get later in the year, we’re seeing more and more pressure on that side. And we’ve had instances in some of our divisions where some contractors are coming back to us and basically saying they’re going to have to work over time with their folks or that they’re going to need to see some price increases in order to stay on the job. It’s been a very competitive environment out there and we’re trying to hold our build times and obviously complete our homes and deliver those for our expectations. So those are and they have been continuing to be headwinds for us for quite some time.”