Homebuilder KB Home (KBH) signaled in its quarterly earnings report this week a “significant” improvement in homebuyer demand as mortgage rates have moderated, pointing to a strong start to 2024 for the US housing market.
“As interest rates have now declined since the end of our fiscal year, demand has improved significantly,” Jeffrey Mezger, KB Home president and CEO, told analysts on a conference call this week.
Mezger’s comments come as mortgage rates pull back from last year’s highs. The average rate on 30-year fixed mortgage loans ticked up to 6.66% from 6.62% a week prior, according to Freddie Mac on Thursday. That’s still lower than the 7% rate seen in late September last year.
As mortgage rates surged in 2023, buyers pulled back due to higher borrowing costs while existing homeowners were more reluctant to sell homes they’d financed at lower rates.
In response, homebuilders nationwide used incentives to spur buyer interest and soften the sticker shock facing many buyers.
Some of the popular concessions included aggressive rate buydowns when the builder pays upfront to reduce the interest rate on a mortgage or rate locks, which lock in a rate so it won’t change for a certain period of time. And it worked.
Over the last year, shares of KB Home have gained more than 73%; over that same period, the iShares U.S. Home Construction ETF (ITB) is up nearly 53%.
During the fourth quarter, KB Home said offered its built-to-order model buyers a rate buy down program and about 60% of their orders included some form of a mortgage concession.
“[As] a result, there is a higher degree of confidence, both for buyers and for us, of the likelihood of closing, even if rates continue to rise,” COO Robert McGibney said on the call with analysts.
The recent drop in rates boosted the builder’s net orders in the first five weeks of the first quarter of its fiscal year to 904 homes, more than double the 403 net orders logged in the comparable period of the prior year. The rise in December’s orders was “unusual” due to the winter months being a slower season for sales, Mezger noted on the call.
“To us, this speaks to the pent-up demand for home ownership,” Mezger added.
During the company’s fiscal fourth quarter, which wrapped up on Nov. 30, 2023, the company saw net orders tally 1,909, up 176% from the prior year. Wall Street analysts had expected net orders to come in closer to 2,470 homes, according to Bloomberg data.
Improved buyer appetite echoes a surge in mortgage application activity seen at the start of this year, with applications rising 9.9% during the first week of 2024, according to Mortgage Bankers Association (MBA) data ending on Jan. 5.
Meanwhile, confidence among buyers rose 2.9 points to 67.2 in December, Fannie Mae’s monthly Home Purchase Sentiment Index showed.
New year, new outlook
KB Home closed 3,400 homes in the fourth quarter driven by better cycle times, or how long it takes to build a house, and a strong backlog of buyers committed to closing on their home when completed.
The average selling price of a home this quarter was $481,300, a 4.5% drop compared to last year.
Going forward, KB Home warned that their popular incentive strategies could be pulled back this year.
“As we go through Q1 or into Q2, and we start to see that at a community level [we] get above what we think is optimal for that, we’re first going to reduce those incentives, [and] take it to price,” McGibney said.
In its fiscal 2024, the builder expects housing revenue to land between $6.40 billion-$6.80 billion. The average price tag for a home will range between $480,000-$490,000.
“We believe we are well-positioned to achieve our objectives supported by the recent decline in mortgage interest rates, our solid portfolio of communities and anticipated expanded community count, improving cycle times, and healthy net order activity during the first 5 weeks of the new fiscal year ahead of the spring selling season,” said CFO Jeff Kaminski.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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