One of the leading homebuilding companies in the U.S.,
) recently stated that it has observed a marked increase in the
average square footage of its new homes that have been purchased in
the Sacramento area over the last two fiscal years. The
increase in the size of homes is attributable to the change in
consumer preference toward larger homes, given the low mortgage
Consumers tend to opt for larger floor spaces instead of smaller
floor plans as there is a nominal price difference between the two.
Also, lower mortgage rates translate into lower monthly
Owing to its operational business model KBnxt, KB Home always
begins construction only after a purchase agreement is executed. As
such, the consumers get the liberty to plan their homes according
to their preference.
This process also helps the company turn over its inventory more
quickly than its peers, thereby supplying capital for reinvestment.
In the long run, this reduces the risk of unsold inventory, leading
to higher returns on invested capital.
The company has been intending to make a strategic shift in its
geographic footprint. The focus is to place the communities in
highly desirable land-constrained submarkets that enable it to sell
larger, higher-priced homes, thus driving a strong increase in
average selling price. The present increase in demand for larger
floor space will also contribute to the average selling price of
A peer of
DR Horton Inc.
), KB Home expects fourth quarter revenue to increase 35%
sequentially, owing to higher average selling price and better
backlog conversion rate. The Zacks Consensus Estimate is pegged at
$569 million for the fourth quarter 2012, up 26% from the
We currently have a Neutral recommendation on KB Home. The stock
carries a Zacks #2 Rank (a short-term Buy rating).
D R HORTON INC (DHI): Free Stock Analysis
KB HOME (KBH): Free Stock Analysis Report
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We believe that the housing market is slowly stabilizing with an
increase in employment rates and higher consumer confidence. We
appreciate the company's strategic initiatives like land
investments in higher priced and better located communities.
However, we are aware that the market is still experiencing uneven
recovery and the company may have to wait for some time before it