Southern California's biggest home builder has been betting on the higher end of the housing market. And so far, that bet appears to be paying off.
KB Home reported stronger-than-expected earnings Friday, thanks in part to a big push into higher-priced markets in the Southland and Bay Area. The average price of a new KB home ordered in California in the three months that ended May 31 hit $591,000, up 18% from a year earlier, the Los Angeles company said.
That's the result of a concerted effort to appeal to wealthier buyers, launching projects in more desirable markets where land is scarce and building higher-end homes for customers with good jobs, KB Home said.
"Our strategy is working quite well," Chief Executive Jeffrey T. Mezger said. "In these areas, it's a price-driven recovery."
That recovery helped lift KB to a profit of $26.6 million in the second quarter, compared with a $3-million loss in the same period last year. Revenue grew 8% to $565 million. Those figures beat Wall Street expectations and helped push KB's stock up 81 cents, or 4.5%, to $18.69 on Friday.
The big builder's experience reflects a split in the broader housing market, especially in high-cost areas like Southern California. Sales of homes aimed at wealthier buyers have been stronger, while less well-heeled buyers wrestle with tight lending conditions and low inventory. And while builders wait for first-time buyers to come back to the market, they're chasing the safer bet of the high end.
There's huge demand there, Mezger said, pointing to KB's developments in Playa Vista just east of the Ballona Wetlands, where three-bedroom houses start at nearly $1.1 million. It's a rare big new project in a part of the region that's flush with cash from the booming "Silicon Beach" tech scene, Mezger said. And it's selling well.
"There's no new homes to speak of for 10 miles in any direction," he said. "You have millions of people and lots of jobs, and as a result you can bring a product to market that's higher-priced, because of the market it's in."
The competition for these sort of sites is fierce, but KB's deep roots in major California markets help win deals and get projects built, Mezger said. And it plans to keep buying. Through the first half of the fiscal year, KB has increased its land acquisition spending 50% from the previous year to $860 million. For the full year it's planning to spend $1.6 billion, a good chunk of it in California.
"We're going to chase everything we can in land-constrained areas," Mezger said
The shift makes sense in a housing market where more middle-class buyers are still struggling to buy but wealthier consumers have good options, said Megan McGrath, an analyst with MKM Research in Stamford, Conn.
"Almost by necessity all the home builders have done this. KB has taken it to another level," she said. "In California it's just a bit more extreme, because the income level is more divergent."
By Southland standards, most of KB's projects aren't particularly pricey — developments in Santa Clarita and Pomona are in the $400,000 to $500,000 range — said Paul Dennehy, senior vice president at Meyers Research, a home-building consulting firm in San Diego. But the company has been smart to broaden from its longtime focus on first-time and entry-level buyers.
"They've evolved to be a more diverse company," he said.
Still, it's not all at the top of the market. KB has seen success selling to middle-income buyers in lower-cost markets that have had strong job growth, such as in Texas.
And the company is seeing customers shift inland, with would-be buyers who are priced out of Irvine, for instance, showing up at KB developments in Chino and Corona. Next, Mezger predicts, the pace of building will pick up again in western Riverside and San Bernardino counties.
"We're very bullish long-term on the Inland Empire," he said. "It's a very large market when it's in balance. Right now we're following the wave to where demand is."