KB Home (KBH) shares slide after the homebuilder reported mixed third quarter results. Jay McCanless, senior vice president of equity research at Wedbush, joins Morning Brief hosts Seana Smith and Brad Smith to break down KB Home’s results and what it means for the homebuilder and its investors.

The analyst, who raised his price target for the stock, tells Yahoo Finance the company indicated on its earnings call that the quarter saw a "rocky start, but it sounded like the finish in the quarter was pretty good," contributing to the mixed report.

As the Federal Reserve cuts rates, mortgage rates will fall, which could benefit homebuilders like KB Home. McCanless suggests it may take some time before investors feel the cut-driven gains. "It seems like there are pockets of strong demand. There are also pockets of weak demand. We would have thought falling mortgage rates would have had a faster impact or a more positive impact on KB. I think the people who watch these stocks every day were looking ahead now to the spring season and trying to figure out whether or not these rates are going to move lower from here. If they are, then maybe a little short-term pain in terms of an order miss and earnings miss might be rewarded as we get towards the spring season."

He adds, "The other thing that is going to be applicable for KB and the rest of the group is that buyers are responding to [rate cuts]. And I think that's still the best takeaway we have from KB for the rest of the group, is that when rates did start to move lower, you know, low sixes on the 30-year mortgage rate, people did start to show up and affordability got better." He notes that homebuilders have the benefit of "being able to offer fresh product" as well as "the ability to give incentives to mortgage rates, buydowns, do things to help people find the payment they need" when compared to existing home sales.

The analyst says the company's outlook for sales was higher than Wedbush and consensus estimates expected though McCanless didn't change his full-year targets for fiscal 2024 "mainly just because we do think it's going to be a competitive environment, you might see some mortgage rate volatility on the way to the spring selling season. So we're just taking a more cautious approach there, but I would say just in general gross demand is looking better, at least from KB's front.

McCanless highlights that "the primary challenge for builders" is the cost of land as well as the cost of development. "The good news, and KB talked about this on the call last night, is that they've seen some savings on lumber and some of the other direct inputs as well as some labor savings. So they're finding ways to offset some of the rising land prices...so that's another reason that we did keep our gross margin flat for where we were for fiscal 25, just because we're not seeing any slowdown in those land and associated costs."

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This post was written by Naomi Buchanan.