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KB Home thinks small to spur sales

KB Home is discovering that less could be more when it comes to luring skittish buyers in a housing slump.
/ Source: The Associated Press

KB Home is discovering that less could be more when it comes to luring skittish buyers in a housing slump.

In recent months, the company has rolled out a new line of smaller, more affordable homes that it hopes will jump-start sagging sales.

The move by one of the nation’s largest homebuilders comes amid a worsening housing slump that analysts now say could last for several more years.

“Smaller homes generate lower revenues, but they sell faster, therefore the cash returns are better,” said KB Home’s chief executive, Jeffrey Mezger.

Other major builders, including Fort Worth, Texas-based D.R. Horton Inc., also have started downsizing some home offerings. But KB Home has led the way, said Greg Gieber, an analyst with A.G. Edwards & Sons Inc.

“They understand the balance, what they can take away and how much they can reduce price having taken that amenity away,” he said.

Despite the new strategy, KB Home wasn’t able to avoid a disappointing second-quarter. On Thursday, it reported a second-quarter loss of $148.7 million, or $1.93 per share, as it booked a charge due to unsold inventory.

It also posted a 36 percent decline in revenue compared to the year-earlier quarter.

It attributed the loss to the oversupply of homes and declining demand. KB Home declined to give future earnings estimates or project when the housing market might rebound.

Miami-based Lennar Corp. also reported sharp second-quarter losses this week.

Meanwhile, the Commerce Department reported that sales of new homes fell in May by 1.6 percent, the fourth decline in five months. The median selling price of a home fell nearly 2 percent to $236,200.

Some analysts are now projecting it could take as long as four years for builders to sell off excess inventory. Homebuyers can expect more discounting this year, according to Gieber and other analysts.

“What you really need is a much sharper rampdown in production, and that’s what has to be driven home to the builders,” Gieber said.

Like other homebuilders, Los Angeles-based KB Home has struggled to find buyers as would-be purchasers wait for prices to tumble before jumping into the market.

Homebuilders incur losses every day a new home stands empty. They have tried everything from slashing prices to tossing in free kitchen upgrades to entice buyers.

KB Home differs from many other homebuilders because it doesn’t build a house until it has a buyer under contract. Other companies complete construction then seek buyers.

KB Home embarked on its smaller, cheaper strategy about nine months ago, with its first planned communities reflecting the change late last year.

The company declined to disclose national figures on how the smaller homes were selling. But KB said it sold 48 units in the past eight weeks at a Las Vegas community where homes range from 1,267 square feet to 1,608 square feet, and prices start at $195,590.

The homes are as much as 500 square feet smaller than homes buyers might have preferred a year ago, Mezger said.

Prices vary, but the smaller homes are as much as 20 percent cheaper than larger versions. Buyers can still opt to add a bevy of amenities, which can drive up the final price.

“Affordability is a real issue today in most of the markets that we operate in,” Mezger said. “Across the company we’re going to an average smaller-size home.”

A KB Home community in Corona, Calif., called Willow Ranch sold out its initial lots for sale last year, the company said.

The development was originally supposed to have homes as large as 4,000 square feet, but KB Home shifted plans to include smaller-sized floor plans ranging from 2,100 square feet to 2,800 square feet. They start at a base price of $452,000.

Gieber, the analyst, noted that homes in one of the company’s Las Vegas developments was selling well “because they (buyers) could afford it.”

Still, there is only so much homebuilders can do to influence demand given the wider downturn of the housing market and the availability of resale homes, said analyst Chris Hussey with Goldman Sachs.

“They can lower prices, they can do a lot of things, but typically it’s not going to have a big impact on the housing market because the homebuilders themselves don’t make up enough of the housing market to really influence it,” Hussey said.

New home sale activity represents about 15 percent of total housing sales in the U.S., and sales generated by KB Home and the rest of the publicly traded homebuilders make up only about a quarter of new homes sales, he said.

Homebuilders will likely continue discounting, but their margins will keep being squeezed, Hussey said.

“We fear that the increased competition from the resale market will continue to cause the builders to lose pricing power,” Deutsche Bank North America analyst Nishu Sood wrote in a research note earlier this month.