KB Home captured attention within the home-building industry on Friday with its disclosure that it has seen first-time home buyers resurface in certain markets, perhaps the earliest sign of a long-awaited resurgence needed to boost the industry back to its normal production rates.
The declaration by KB Home Chief Executive Jeffrey Mezger during the national builder’s quarterly earnings call was met with mild skepticism, though. After all, other big builders, including Lennar <strong>Corp.</strong> CEO Stuart Miller on Thursday, have said they see little evidence yet of first-time buyers returning in significant numbers.
Yet Mr. Mezger was resolute in his prepared remarks about KB Home’s results for the quarter ended May 31 that job growth in Dallas, Denver, Orlando and other markets has led to an increase in first-time buyers for KB Home there. He didn’t quantify that increase on the call.
“It is in those markets with their more traditional recovery where we are starting to see the re-emergence of the first-time buyer, a critical segment necessary to ensure a broad-based housing recovery,” Mr. Mezger said.
In this year’s first quarter, 52% of the mortgages that KB Home originated went to first-time buyers. The company hasn’t yet divulged its second-quarter percentage.
Mr. Mezger attributed some of the renewed activity by first-timers to a slight easing in mortgage-qualification standards. Case in point: Average FICO scores on mortgages backed by Fannie Mae have declined to 741 in this year’s first quarter from 757 a year earlier. A lower score means more credit risk.
Mr. Mezger added that lenders are getting more comfortable with requirements from the Federal Housing Administration, Fannie Mae and Freddie Mac in regard to which types of mortgages they’ll back and which they won’t.
Others are more cautious in their outlook for the entry-level market. David Goldberg, an analyst who tracks home builders for UBS Securities, described the return of first-time buyers and the easing of credit standards as “very marginal.” Rather, what is happening, he says, is that builders are beginning to cater a bit more toward entry-level buyers after realizing they’ve nearly tapped out the market for more affluent buyers.
“I think there’s a ton of uncertainty about the entry-level buyer, and builders have been reluctant to put product in the market to cater to them,” Mr. Goldberg said Friday. “But what I think is happening is builders are discovering that they can’t grow their business by catering [solely] to the move-up buyer.”
Once first-time buyers do, in fact, re-emerge, the housing industry and the economy will welcome them. Home construction typically accounts for about 5.5% of U.S. gross domestic product, according to the National Association of Home Builders. But it only contributed 3% in this year’s first quarter.
Some of that shortfall is a result of less buying by first timers. According to the builders’ association, first-timers have accounted for 16% of new-home sales so far this year, down from 25% to 28% from 2001 to 2007.
Investors generally liked KB Home’s quarterly results on Friday, sending its shares up 4.5% to close at $18.69 in 4 p.m. composite trading on the New York Stock Exchange. The Los Angeles-based builder reported that it landed contracts to sell 2,269 homes in the quarter, up 5% from a year earlier. Its revenue of $565 million was a 7.7% gain, and its net income of $26.6 million handily topped its net loss of $3 million from a year prior.
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