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Homebuilding company KB Home (KBH) stock is declining due to the company's disappointing first quarter sales and reduced outlook.
Bank of America Securities senior equity analyst Rafe Jadrosich joins Morning Brief hosts Brad Smith and Madison Mills to discuss how these challenges reflect broader softness in the housing market.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
Rafe, good to have you here with us this morning. Just take us into your analysis on KB Homes and what it signals about the broader housing market and buildouts right now.
Hi, good morning, and thanks for for having me. Yeah, I think it was a really challenging first quarter for for KB, um, home in the broader housing market. We also had Lennar report last week, and in general, home buyer demand remains remains soft. Uh, we have still have elevated mortgage rate, consumer confidence is weak. Uh, builders have had to come out and adjust some some net price. Um, in some cases, it's with higher incentives, rate mortgage rate buy downs. In the case of KB Homes, uh, they actually reduced some base prices in about 50% of their communities. They lowered price by about $15,000 per home. Um, so so we're seeing a soft market, uh, but right right now that's impacting both orders and margins.
Yeah, and they also talked about these soft spring that they are experiencing to your point, Rafe. Is that a sign of things to come in the housing market?
It's it's been really consistent across builders that have reported so far. They're not seeing the typical seasonal uptick that you would anticipate at the beginning of of spring selling. Um, we do think some of this is concentrated by by uh by certain markets. So the southeast right now is weaker than the rest of the country. Um, particularly if you look at at Florida and Texas where there's some some elevated inventory, but we we've generally not seen a a normal seasonal uptick that you would anticipate in spring.
And so as they're forecasting some of these margin declines into 2025, how is that also going to see some pressure both on the materials and the labor side, which we all know are two of the major kind of shifting considerations or larger headwinds at this juncture for the home builders?
So builders in addition to like kind of the soft demand environment that we've seen, builders actually are facing a a pretty inflationary environment. Uh, the biggest headwind is actually coming from the land side. So land that they contracted over the last few years that they're delivering homes on today have quite a bit of inflation. In some cases, it's even double digit percent. Um, so so that's a big big headwind. Um, on the material side, I think the big risk there is is some of the tariff pressure. Um, and the the one we would call out would be lumber. About a third of lumber in the US comes from Canada. Um, obviously there's been there's been um a proposal for a 25% percent uh tariff there. So that's the biggest material pressure. So far on the labor side, they're actually not there has not been disruption. Um, seasonally it's not a big time for for for building at the beginning of the year. So it's definitely something builders are concerned about, but they haven't seen. But we are seeing some material and land pressure on on on the builder's margins.