All in all, KB Home (NYSE: KBH) posted a reasonably solid quarter. But like other recent reports from homebuilders, Foolish observers of the housing market are more inclined to parse management's words about the market's likely direction than concern ourselves excessively with the absolute levels of past sales or earnings.
But let's quickly do just that. For the quarter ended Feb. 28, KB's net income was $27.5 million, or $0.34 per diluted share, versus $173.3 million, or $2.01 per share, last year, when the market was still reasonably robust. Analysts apparently had expected earnings of $0.23 for the most recent quarter.
The company delivered 6,655 homes, versus 7,905 units in the comparable quarter of the prior year. The all-important backlog at the end of the quarter was 18,406 units, a 31% decline from the 26,536 homes when last year's first quarter closed, and the cancellation rate dropped to 31%, from 48% in the fourth quarter of 2006.
"Despite the recent improvement in our first-quarter net order experience and a lower cancellation rate, there trends should be viewed with caution," KB President and CEO Jeffrey Metzger said. "Having now entered the spring selling season," he continued, "we continue to observe instability in the marketplace. Moreover, recent problems in the subprime mortgage market, combined with tightening credit requirements, could exacerbate the already difficult conditions in the homebuilding industry." Sounds to me like a continuing high level of caution.
Metzger isn't ready, then, to predict a rosy future for housing in general or his company in particular. Coincidentally, his comments occurred the same day that an executive from giant mortgage lender Countrywide (NYSE: CFC) told a government panel that his company's subprime defaults for 2006 could top those of 2000 -- the worst single origination year to date.
I'm increasingly worried that the cacophony of concern about the state of subprime lending may lead to precisely the sort of tighter lending standards that Metzger fears, and that those tighter standards could easily affect even the prime market. While the standards for less creditworthy borrowers have been absurdly loose, a general tightening of lending standards that carries over to the higher classes of borrower would be most inappropriate, it seems to me. The results obviously could be very tough on the homebuilders, as well as on the nation's economy.
So, Fools, all we can do is (figuratively) hide and watch this still-emerging situation. As I've said repeatedly, in the meantime, if you're able to justify a longer-than-normal investment time horizon, I would continue to argue that there's money to be made over time with investments in well-managed and geographically diverse builders Centex (NYSE: CTX) and Ryland (NYSE: RYL), as well as luxury builder Toll Brothers (NYSE: TOL).
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Fool contributor David Lee Smith owns shares in Centex, but not in the other companies mentioned. He welcomes your questions or comments. The Fool has a disclosure policy.
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