[ad_1]
Want more housing stories from Lance Lambert’s ResiClub in your inbox? Subscribe to the free, daily ResiClub newsletter.
Over the past two years, housing affordability has become strained to levels not seen since Jeffrey Mezger took over as CEO of KB Home in 2006. Soon after taking the helm back then, Mezger had to navigate the homebuilder through a bursting housing bubble that sent home prices and residential construction into a free fall.
In an exclusive interview with ResiClub, Mezger acknowledged that housing affordability is an issue; however, he says we’re in a very different backdrop today compared to 2008.
“In spite of all the blur and the affordability and the noise and the inventory and everything in the media, underneath that, people want to be homeowners, and so we’re seeing that,” Mezger tells ResiClub. “We sold 5.5 homes a month per community [last quarter]—it’s one of the highest levels in the company’s history.”
The underlying reason that big homebuilders are in a good spot, Mezger argues, is that “you’ve got 15 years now of undersupply” in the U.S. housing market, which has yet to catch up to the underbuilding during and following the Great Financial Crisis.
Below are the big takeaways from ResiClub’s recent conversation with Mezger.
Affordability challenges haven’t stopped giant homebuilders
“Affordability is a challenge [but the outlook for housing] demand is still strong,” Mezger says. “You have these two cohorts, millennials and Gen Z, 150 million people between the two who want to be homeowners. . . . How do you solve that? How do you connect the dots of affordability in the right location and price for them?”
To help with affordability, which has been strained by overheated home price growth during the pandemic housing boom and the subsequent mortgage rate shock—and to get millennials and Gen Z into homes—many builders have compressed their margins and expanded incentives such as mortgage rate buydowns.
“We’ve had a slight increase [in mortgage concessions] since we spoke last year,” Mezger says. “There are affordability pressures out there, so in some locations if it’s a lower-priced first-time buyer community, we may offer a little bit of mortgage concession. Total incentives, we reported, as a percentage of revenues is 2% [at KB Home]. Many of our peers are 6%, 7%, 8%, or 9% of revenue for mortgage concession.”
Instead of buydowns, Mezger says KB Home “leans heavily on price,” and when needed will cut prices in housing markets where inventory has gotten too high or where the premium of new-home prices compared to resale-home prices has gotten out of whack.
Mezger argues that KB Home’s “build-to-order approach” helps address “the affordability issue” by allowing buyers to personalize the product according to their needs and budget.
Most publicly traded homebuilders still have margins that exceed pre-pandemic levels
Even with affordability adjustments, and some profit margin compression, most publicly traded homebuilders still have gross margins that exceed 2019 pre-pandemic levels. That includes KB Home.
KB Home’s gross margin in the second quarter of 2019 was 18%, compared to 21.9% in the second quarter of 2024.
KB Home is keeping an eye on Florida
From June 2023 to June 2024, active housing inventory for sale in Florida has jumped 71%—marking the biggest state-level jump and well above the 37% jump that the U.S. saw during the same time frame. That increase puts active inventory in Florida back to 2019 pre-pandemic levels, while the U.S. remains 31% below pre-pandemic inventory levels.
That increase in Florida inventory has caught the attention of KB Home executives; however, it hasn’t led to a significant impact on KB Home’s Florida sales yet.
Mezger points out that while the months of supply are rising, most Florida markets still remain below the historic average of six months of supply. Tampa, for example, has gone from 1.8 months of supply to 3.6 months of supply.
KB Home’s strongest housing markets
When I spoke with Mezger in August 2023, he said KB Home’s weakest housing market was Denver, where the new-home price premium over resale prices had become too wide during the pandemic housing boom. In contrast, its strongest housing markets were in places like Las Vegas and the Inland Empire in California.
What about in 2024?
“I would reaffirm that Vegas and the Inland Empire are still very strong. They’re two of our biggest businesses and sales are very strong there,” Mezger told ResiClub. “Things are pretty good across our footprint today. Denver actually has improved since last year, in part because the market corrected. It was more out of whack last year, and its pricing reconciled with inventory and incomes. Denver is performing better now, but we have the same dynamic nationally for our company in that where we’re operating, especially at our price points, there’s very little resale inventory.”
Big builders are taking market share from smaller homebuilders
Back in 2006, when Mezger took the helm at KB Home, publicly traded homebuilders made up 26% of new-home closings.
That figure slowly ticked up to 37% in 2019; however, the recent mortgage-rate shock has coincided with publicly traded homebuilders’ market share spiking to 51% in 2023.
“The numbers support that the larger builders are . . . taking share from two sources,” Mezger says. “One is smaller builders that are having difficulty with financing. Banks are very conservative right now on what they’ll lend a small builder to go develop lots. But you’re also taking share from resale because of the limited resale inventory.”
What would have to happen for new home prices to fall further?
While most big homebuilders have seen their average sales prices fall since the conclusion of the pandemic housing boom—partly due to a mix shift toward smaller homes—new-home prices still remain well above pre-pandemic levels and are rising again in some markets.
Last summer, Mezger said the metric to watch to see whether homebuilders would cut prices is local inventory, particularly local months of supply. These days, that’s still what Mezger believes people should keep an eye on, as well as the economy and the job market.
“It wouldn’t surprise me if the economy cooled off a little from here,” Mezger says. “But I think the strength and the demand and the demographics more than offset that, so we’re pretty bullish and excited right now on where things are headed.”
[ad_2]
Source link
