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Feb.13

3:18 PM ET

Tuesday, 13 Feb 2007

KB Earnings Tell it All

Posted By:Diana Olick

Topics:Earnings | Housing

Sectors:Construction and Materials

Companies:KB Home

A bright spot in today’s earnings report from KB Home [KB Loading... () ] , one of the nation’s largest home builders: prices on their homes are coming down this quarter. While the company posted some nasty earnings for the fiscal fourth quarter and is showing a 48% cancellation rate, that fact bodes well for the usually busy spring season. Prices have been the most stubborn to turn around in this housing turnaround, and until they do, buyers will sit on the sidelines.

Stocks on all the homebuilders took off on the KB report, simply because it wasn’t nearly as bad as the street had expected, pretty telling about the current climate in the industry. The analysts are using the word “bottom” more and more, especially when referring to the stocks, and all those land charges, which, like a wrecking ball, brought the big builder numbers crashing down, the analysts believe are mostly over.

So what does that mean for a recovery? Well, here’s the rub: on the good side, prices are coming down, land has been dumped, and housing starts are slowing, but on the negative side, inventories are still way too high.

“There's two million vacant houses in the system right now, there should be one,” says Margaret Whelan, homebuilder stock analyst for UBS. “So the fact there's so much inventory in the system makes it hard for the big builders to generate new orders.”

And new orders are the future of course. Incentives will continue to go up as the builders fight for the few buyers out there, which is great if you’re in the market for a new home, but not great for the builder balance sheets. But there does seem to be a ray of hope.

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“Market conditions – some builders have said that market conditions are starting to improve,” notes Michael Rehaut of JP Morgan. “A couple of markets like Washington D.C., Northern California, even parts of Southern California – other markets that were some of the last markets to soften are still going through their correction.”

I have to say, however, flipping through the Sunday Real Estate section of the Washington Post a few days ago, it didn’t look too promising. Full and double page ads screamed from the big public builders, touting deals like, “Dollar Days”, in which the builder will give you extras like built-ins and granite for a dollar. Virginia, which is going through a major new home correction, turned the Sunday pages into a give-away free-for-all.

Spring. That’s the buzz. Wait to see what the spring brings, and then we’ll know where the market stands for all that new construction.

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