KB Home is relying on its built-to-order model as the housing market weakens, with 74% of its third-quarter deliveries coming from built-to-order homes. This shift has provided the company with cost visibility, delivery certainty, and limited risk, according to CEO Rob McGibney.
Despite year-over-year declines in deliveries, revenue, and profit, KB Home achieved its target of a greater built-to-order mix in the third quarter. McGibney told investors that the built-to-order model was designed to perform in current market conditions, enabling the company to sell before building and keep inventory risk low as demand softened.
Shift in Mix Drives Margin Improvement
The shift in mix helped drive sequential margin improvement and delivered KB Home’s first year-over-year backlog increase in four years, ending the quarter with 4,398 homes in backlog. However, the builder noted that conditions weakened through the quarter, with resilient June sales turning to soft July and August traffic.
As a result, net orders declined 12% year-over-year to 2,604 homes. The company’s total unsold inventory represented 26% of production in the third quarter, down from 41% a year ago. Finished unsold homes represented just 9% of total inventory, down from 16% the year-prior.
McGibney said the company’s built-to-order approach also protects its business, with roughly 1,110 homes sold but not yet started. This illustrates the built-to-order approach at work, building homes for buyers who have already committed, not for buyers the company hopes to find.
Construction cycle times also improved during the quarter, with built-to-order homes averaging 99 days from start to completion, down 23 days year over year. The faster build times shorten the waiting period for buyers, helping lock in mortgages with greater certainty and improve inventory turns.
Challenges in the Housing Market
Despite operational gains and tailwinds from the built-to-order model, executive chairman Jeffrey Mezger reiterated the market factors challenging results and the housing market. Higher interest rates, persistent inflation, and broader economic uncertainty all worked against the sector during KB Home’s fiscal third quarter.
Mezger noted that affordability is under further pressure due to rising mortgage rates, and inflation remains persistently high. These factors, as well as geopolitical uncertainty and broader economic headwinds, have resulted in consumers becoming more cautious about buying a home.
During the quarter, revenue fell 20% to $1.3 billion while deliveries declined 19% to 2,732 homes. The builder’s profit dropped 41% to $65.3 million while profit per share fell to $1.05 from $1.61.
The company is also experiencing lower direct construction costs on started homes, attributing the improvement to supplier relationships, contract rebidding efforts, and simplified design studio offerings. However, increasing cost pressure from fuel, inflation, and tariff risks are likely to provide upward pressure on costs in the fourth quarter.
KB Home’s McGibney and Mezger both highlighted the growing challenge the resale market is presenting, with Mezger noting the increase in resale inventory and declining existing-home prices, particularly in Texas and Florida markets, are both emerging headwinds for the company.
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