KB Home, one of the largest U.S. home builders based in Los Angeles, has announced its fourth-quarter earnings, surpassing expectations despite a decrease in both revenue and profit compared to the previous year. However, the company remains optimistic as it observes signs of demand picking up.

Financial Highlights

In the fourth quarter, KB Home reported a profit of $150.3 million, or adjusted earnings of $1.85 per share, with a total revenue of $1.67 billion. Analysts had forecasted a profit of $1.70 per share on revenue of $1.63 billion, making KB Home's results better than expected.

Although home deliveries for the fourth quarter amounted to 3,407 units, exceeding the projected 3,300 units, it marked a 10% decline compared to the previous year. Additionally, the average selling price of homes decreased to $487,300, which is lower than the $510,400 recorded one year ago.

Market Reaction

Following the release of the earnings report, KB Home's stock experienced a 2.1% decrease in after-hours trading. However, during regular trading hours, it hit a new 52-week high.

CEO's Comments

CEO Jeffrey Mezger expressed satisfaction with KB Home's performance in the fourth quarter, describing it as "solid." Mezger highlighted that home deliveries exceeded expectations, a reflection of improved build times.

Furthermore, Mezger mentioned that net orders for the first five weeks of the company's 2024 first quarter have seen a significant sequential increase. Mezger attributed this growth to consumers responding positively to the recent decline in mortgage rates.

Outlook for 2024

Looking ahead to the full-year 2024, KB Home anticipates generating revenue between $6.4 billion and $6.8 billion. Additionally, the company aims to increase its community count by 12% from 242 to around 270 homes by the end of November. KB Home expects the average selling price to range between $480,000 and $490,000 for the same period.

These projections surpass the full-year 2023 revenue of $6.41 billion, which also exceeded expectations. Notably, KB Home reported adjusted earnings of $7.03 per share for the entirety of 2023.

Lower Mortgage Rates Spark Interest in Real Estate Market

The anticipation of lower mortgage rates this year, as a result of expected Federal Reserve interest rate cuts, has attracted the attention of potential buyers in the real estate market. According to the Mortgage Bankers Association, mortgage applications increased by 9.9% for the week ending January 5, on a seasonally adjusted basis.

The overall market composite index, which measures mortgage application volume, rose to 190.6 for the week ending January 5, compared to 186.7 during the same week last year.

While the average 30-year fixed-rate mortgage had risen to 6.62% on January 4, according to Freddie Mac, it is still lower than the roughly 7% rate seen in early December. This decline in rates is particularly significant in a housing market characterized by high costs and limited housing inventory. Lower rates bode well for builders, and new home sales continue to thrive.

Joel Kan, MBA's Vice President and Deputy Chief Economist, views the increase in purchase and refinance applications as a promising start to the year. However, he also believes that this surge is partly due to catching up on activity after the holiday season and year-end reductions in interest rates.

Additionally, two exchange-traded funds that track home builders and related industries experienced positive growth. The SPDR S&P Homebuilders ETF rose by 1.1% to $95.04, while the iShares U.S. Home Construction ETF closed up 1.7% at $101.88.