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KB Home, Prices And A World of Hurt

Thursday, 28 Jun 2007 | 11:45 AM ET
KB Home Sales Center
KB Home Sales Center

I guess I’m beginning to sound like a broken record, but I have to ask it again: just how much can the big public home builders take? KB Home , which has lost nearly a quarter of its market value this year,reported a second quarter that could give a CEO nightmares.

The company posted a net loss of $148.7 million, or $1.93 a share, compare that with a net income of $205.4 million just one tragic year ago. Housing revenues, that’s if you subtract some land sales, were down 41% from a year ago.

I think it’s time to give the CEO the floor: “Our second quarter results reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand,” says Jeffrey Mezger.

Mezger cites affordability “challenges” and tighter credit conditions as exacerbating current market dynamics. Here’s where I have to give a blogger named Robbie the floor: "The underlying fundamentals are completely out of whack and housing has nowhere to go but down. And it’s not because of bad-attitude on the part of the buyers. It’s because people are wising up and seeing that spending upwards of 50% of their income (after taxes) on the mortgage payment just doesn’t get the baby fed any longer.”

There’s your affordability issue. The big public home builders may be lowering their prices a bit, but clearly not far enough. Check out this press release I got from John Burns Real Estate Consulting. Some interesting stats here how much prices would have to fall for housing costs (including mortgage payments, property taxes and down payments) to return to each market’s typical ratio of housing costs/income: Resale Home Prices Are Likely to Fall in Many Markets.

Well, if you think prices are going to fall anywhere near as far as the data in the link suggests they should, then you’re sorely mistaken. But it’s still interesting to see how totally out of whack Americans can be in what they’re willing to pay for a home.

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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