KB Home building smaller houses to lift sagging sales
The company is trying to attract buyers with 1,230-square-foot homes selling for $200,000 in the Inland Empire and other high-foreclosure areas.
By Peter Y. Hong, L.A. Times Staff - Sep. 27, 2008
As California's biggest builder of new homes posted its seventh straight quarterly loss Friday, Westwood-based KB Home said it was trying to boost sales by building small, lower-priced houses instead of the larger ones that had sustained the company during the housing boom.
KB Home lost $144.7 million from July through September, or $1.87 a share, compared with a net loss of $35.6 million, or 46 cents a share, for the third quarter of 2007.
The company's shares were up 40 cents Friday, to $21.56. The stock has fallen 28% from its 52-week high.
The loss exceeded analysts' estimates and came as sales of the company's homes fell 56% in the quarter compared with a year earlier.
KB Chief Executive Jeffrey Mezger said that foreclosed houses being sold at fire-sale prices were continuing to pull home prices down, and that parts of the country that have yet to see the dramatic price declines experienced by California and other Western states were likely to fall next.
The company has been selling smaller houses at lower prices in areas such as Beaumont in Riverside County.
Mezger said the company had to shift to smaller, cheaper houses to compete with foreclosed houses flooding markets such as the Inland Empire.
"The challenge is how do you get your pricing down on new product so you can make money at these lower levels," Mezger said.
The company last year shifted from building 3,400-square-foot homes selling for $450,000 to 2,400-square-foot homes selling for $300,000.
"That worked for a time, but the market continued to move away from us," Mezger said.
Now, KB Home is building three-bedroom, 1,230-square-foot homes selling for $200,000 in the Inland Empire, Mezger said.
It appears it takes a housing disaster to get builders off the dime, to think on a lesser scale, but if you do not water all the crabgrass, some will die off but the hardiest survives.
Low end is reasonable, and these numbers, 3,400 sq.ft., at $450,000 downscale to 1,230 sq.ft. at $200,000 is an awakening. Interestingly, the downtrended home moved from $132/sq.ft. to $163/sq.ft. in the process, meaning land, site prep, and public charges for licenses, fees and permits, stayed fixed. Variable costs, such as siding and roofing and glazing, per interior sq.ft., may also factor into the equation - big homes are cheaper to bulld per sq.ft., but if nobody can afford that these days of tighter credit, it is irrelevant.
McMansions - who knows, but that move from near half-million down is interesting.
Does anyone from the Twin Cities building-real estate world know if any parallel change is happening here? If so, please leave a comment.
________UPDATE THOUGHT_________
If average selling cost and size get downscaled, in say Ramsey where I live, so that builders can move properties - how does that impact the myth of the rooftops? That is, the myth that more rooftops mean more tax base, hence fat city for staff growth and municipal spending - never mind studies saying low-end housing costs more in services spending than it brings in in tax revenue - with uncertainty of where any break even point might be for housing, but with industrial and commercial property in the tax base being the opposite - paying more than it costs. In any event, the disparity between housing in the tax base as burden, and business property as benefit, becomes greater as the assessed value added to tax base per new family, on average, goes down.
Adding a lot more housing in the exurb towns such as Ramsey is unwise for the public taxpayers, but a bonanza for the landowner cashing out the sandy unproductive farm acreage.
What would be worse, however, with that disparity would be to allow those cashing out the farm to socialize entrepreneurial development costs to taxpayers, making the net deal even worse for taxpayers but the land-builder profits greater. Allowing that kind of socialism for a handful is more raw for our citizens to take and more costly in total, to the general public.
Municipal alertness to these realities, and pursuit of fair policies internalizing development costs to the profit seekers seems the only sensible way for an exurban town government to go.