Why KB Home’s turnaround increased: A good geographic exposure
KB Home is a West Coast–based homebuilder that focuses on the first-time homebuyer
KB Home (KBH) is a Los Angeles–based homebuilder that focuses on first-time, move-up, and active adult homebuyers. Its price point is at the low end of the different homebuilders, and it’s more similar to Lennar (LEN) or PulteGroup (PHM) than any luxury builder like Toll Brothers (TOL) or NVR (NVR). It also has a financial services arm that provides title and insurance services.
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KB Home’s geographical advantage
KB Home has exposure to some of the hottest real estate markets in the U.S. The majority of its business is in California and Texas, although it has some exposure to the Southwest and mid-Atlantic states. In those markets, it has the advantage of favorable demographics (especially the fast-growing Hispanic demographic), along with strong economic fundamentals. In these MSAs, prices have been rising at a much faster clip than some of the real estate indices like Case-Shiller. Its East Coast exposure is in the red-hot Washington D.C. market, Charlotte, and Florida.
One big advantage of this is that it has very little exposure to the headaches and slow price appreciation faced in the judicial states like Illinois, New York, New Jersey, and Connecticut. Increasing home prices is a recipe for higher average selling prices, which factor into a company’s gross margins and ultimate profitability. All of these localities have experienced double-digit permit growth since 2010, so they’re further along in the general real estate recovery.
Land acquisition strategy
KB Home’s land acquisition strategy is through the use of options, primarily, which means there’s no specific performance consideration. If it decides it doesn’t want to buy the property, it simply lets the option expire. It has a preferred lending relationship with Nationstar Mortgage (NSM). The first-time homebuyer accounts for 60% of KB Home’s business.