Shares of KB Home (NYSE: KBH) are down more than -7% this morning following the company’s second quarter earnings report. KB Home earnings included diluted EPS loss of -$0.40 on revenues of $374 million. Analysts had been expecting an EPS earnings loss from KBH of -$0.30 on revenues of $373.6 million.
A week ago, Toll Brothers, Inc. (NYSE: TOL) released an update on its third quarter outlook, noting that deposits on new homes were down 20% compared with a year ago. Yesterday,
Lennar Corp. (NYSE: LEN) reported an EPS profit of $0.21 on revenues of $814.5 million. Lennar earnings included revenues that failed to meet estimates of $836 million, but beat the EPS break-even estimate.
The problem is not mortgage rates, which reached an all-time low of 4.69% this week, according to Freddie Mac. That’s the lowest rate since Freddie started keeping records in 1971, but sales are falling and mortgage applications are too.
Home buyers just don’t pay any attention to mortgage rates any more. The chief concerns are fear of unemployment, the expiration of the home-buyer’s tax credit, and tougher lending standards. People are simply scared of taking on debt, or they’re scared of losing their jobs, or they’re scared of being rejected for a mortgage. That’s trouble for Lennar, KB Home and others.
Unemployment is pegged to remain above 9% through the end of this year. Today’s announcement that GDP rose just 2.7% last quarter instead of the 3.5% reported earlier won’t help reduce unemployment. GDP has to grow by about 3% just to accommodate new entrants into the job market, and it has to grow by about 5% in order to lower unemployment by 1%. That’s not happening.
Low mortgage rates are having little effect on new loans, but refinancings are climbing a bit after having fallen by 50% from the refinancing surge of early 2009. Lenders are demanding blue-chip credit and consumers who don’t think they’ll qualify just don’t bother to try.
KB Home reports a backlog of 3,175 homes at the end of the second quarter, down 17% from a year ago. Homes delivered fell 3% and the selling price fell 5%. Future revenues from the current backlog total $648.2 million, a 19% drop from a year ago. That is in line with Lennar’s reported drop of 4.4% on its average selling price and new homes ordered are down 10%.
Amazingly, the home builders are upbeat about prospects for the second half of the year. They believe that the tax credits brought sales forward to April and that pent-up demand for new homes will generate better revenues and profits in the rest of this year.
Fearing for their jobs and unable to get credit, it’s hard to see how home buyers are going to make the homebuilders’ wishes come true.
