When KB Home was known as Kaufman & Broad, it had the reputation of selling fairly modest, affordable homes to the masses during the postwar era’s long suburban growth.
But during the recent housing boom, the company’s revenue and profits soared along with the size of its houses – until the bubble burst.
However, the Westwood homebuilder thinks it has found a formula for success now that the market appears to be slowly recovering: It is building fairly modest, affordable homes again.
Earlier this year, KB launched its Open Series line, homes that can run less than 1,500 square feet and sell for less than $150,000, far less than the models that regularly topped 4,000 square feet and $500,000 earlier this decade.
And it’s not just size that differentiates the homes.
While McMansions of a few years ago featured granite countertops, sunken tubs and outdoor fireplaces, the new homes can be ordered without doorbells and garbage disposals, all in the name of saving a buck.
“It is a concentrated effort to really go to KB Home’s roots to offer first-time buyers what they need,” said Steve Ruffner, president of KB Home’s Southern California coastal division. “The demand for these homes has been terrific.”
KB Chief Executive Jeff Mezger said in a Sept. 25 conference call that Open Series homes are projected to account for more than 50 percent of all the houses sold by the company in the fourth quarter. In its third quarter ended Aug. 31, the company delivered 2,240 homes nationwide.
In the last year, the company has opened 12 Open Series developments in Southern California, including one in Lancaster and a second that’s set to open in that high desert city this month. In contrast, it has opened only two developments of larger homes in the region.
So far, any impact on the bottom line has been modest. KB posted losses the last three quarters, including $66 million in the third quarter. However, the strategy has some analysts cautiously optimistic about the country’s fifth largest homebuilder.
“KB was one of the first to start to downsize their homes so they could take as much cost out of the equation so that they would be able to sell at a lower price,” said analyst Robert Stevenson of Fox-Pitt Kelton Cochran Caronia Waller in New York, who rates the company’s stock a hold. “It’s a difficult environment out there. These guys are doing a decent job of operating.”
The housing bust and recession crippled the housing market, but in recent months there has been a small rebound, with buyers taking advantage of low interest rates and prices.
The company began experimenting by selling smaller homes as early as April 2008, but it wasn’t until this year that it officially launched and marketed the Open Series line. One of the motivations was to find a way for its new homes to compete in markets such as the high desert, inundated with very cheap and fairly new foreclosed properties. So far, the strategy seems to be working at the two local developments.
Sedona at Terreno Vista in Lancaster has homes starting at 1,239 square feet, and even three-bedroom houses are priced as low as $132,000, well below KB’s average national selling price of $202,800 in the third quarter. The 90-unit project has only a couple homes left for sale.
“It was a really successful community for us,” Ruffner said.
The second project, Bedford at Terreno Vista, will open Oct. 24. The 100 homes there range from 1,371 to 2,530 square feet, with prices starting around $150,000. While the company does not discuss sales projections, Ruffner said that the company is very pleased with the interest list.
Aside from the smaller size, one reason the company can sell the homes so cheaply is that they are designed to have an open common area, which connects the kitchen, dining and living room areas. The design requires fewer walls, therefore less lumber and fewer construction hours. Some homes include other efficiencies such as bathrooms built back to back to cut down on plumbing costs.
While KB does not disclose its construction costs, industry consultant Jody Kahn said KB is able to build Open Series homes for around $30 per square foot, which she termed very low. Costs of $100 per square foot or more are not unusual.
“What I see is that their sales may be leading and setting the price in a number of areas,” said Kahn of John Burns Real Estate Consulting Inc. in Irvine, a housing industry consultancy.
Ruffner said the company has given attention to design so the homes don’t feel like big boxes. “It is great-room living. You can see through the unit to the backyard and it feels really open.”
The homes can be customized. Buyers can add a bedroom, order different types of faucets and lighting, and add landscaping features. But they can also delete options to save costs. That means doing away with seemingly utilitarian features such as garbage disposals.
“I do commend them for saying, ‘We have to really revisit what it means to build a starter home,’” Kahn said. “Will somebody live without a garbage disposal? Yes they will.”
But she also cautioned that homes with multiple options can make buyers feel like they are being nickel-and-dimed to get the home they want. And there are added costs in dealing with each buyer’s selection of options, from tracking the changes to making sure they get implemented.
KB wouldn’t divulge local sales figures, but data provided on California sales show that the development of small homes appear to have had a significant effect on total home sales.
The company received 591 orders – in which a buyer entered into a contract to purchase a house – in the third quarter, a 64 percent increase from a year ago, when there were 361 third quarter orders in California.
Mezger said in his conference call that a big reason is that the smaller, less expensive homes appear to be helping KB capture the first-time buyers – the group that first brought the company success. About 80 percent of sales are to first-time buyers, while that group accounted for less than 40 percent of sales in 2006.
“With KB delivering a smaller home, they are able to deliver at prices unprecedented in Southern California – prices that go back 10 to 15 years,” said Jeff Meyers, principal of Meyers Builder Advisors LLC, a Corona Del Mar homebuilding market research firm. “In a lot of these markets, if you can afford to rent, you can afford to buy.”
There are some roadblocks. For one, the Federal Housing Tax Credit of $8,000 for first-time home buyers will expire Nov. 30, and its loss will slow sales, according to many analysts. What’s more, the small improvement in the housing market does not necessarily point to an imminent recovery. Many believe it will take years before the market fully recovers to normal growth. KB’s shares tumbled earlier this month when a Credit Suisse analyst downgraded the stock, citing the impending loss of the federal tax credit. Shares closed Oct. 7 at $15.19, a 25 percent decline from a high point it reached a month ago. (And well off the $80-plus-per-share highs of the boom years.)
“The problem for these guys is that you can’t swim upstream,” Stevenson said. “There is only a certain portion of the population that is willing to buy a home.”
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Homebuilder On Move Into Cities
- Who's Who in Real Estate: Steve Ruffner - Executive All Fired Up
- Residential Builder Homes In on Some Positive Signs
- That Empty Feeling
- KB Shares Fall Despite Stewart Deal
- KB Home to Build Solar Community in Valencia
- KB Home Buys Lots in Santa Clarita
- Welcome Mats Go Unused at Palmdale Project