The homebuilding industry has faced challenges due to high mortgage rates, pushing companies to offer promotions to counter affordability issues. However, KB Home (KBH, Financial) delivered better-than-expected Q4 results, providing a positive outlook for the sector. Supported by a robust labor market and favorable demographics, KBH saw a 40% year-over-year increase in net orders during Q4.

Despite a 23% decline in KBH's stock since December, the company's quarterly performance and outlook have alleviated concerns about deteriorating business conditions. Yet, high mortgage rates remain a significant hurdle.

• KBH noted during its earnings call that mortgage rates rose from September to November, despite two Federal Reserve rate cuts totaling 75 basis points. This led to some potential buyers delaying purchases, especially in the last two months of Q4, causing KBH to miss its internal sales targets.
• Hesitation continued into Q4, with net orders down 12% year-over-year to 1,026 in the first six weeks of 1Q25. However, KBH expects orders to increase during the spring selling season. The company improved build times by 28% on average, resulting in a 17% rise in deliveries to 3,978 homes in Q4.
• KBH maintained its base prices, with the average selling price increasing 3% to $501,000. Direct costs, such as lumber and concrete, decreased towards the end of FY24, helping offset incentives like mortgage rate buydowns offered to 60% of customers in Q4. Consequently, the adjusted housing gross profit margin increased by 20 basis points sequentially to 20.9%.
• Looking ahead, KBH anticipates its housing gross profit margin to remain stable at 20.0-21.0% in FY25. The company plans to mitigate potential cost increases from tariffs under the new administration through volume-based pricing.

Overall, KBH's Q4 performance and FY25 guidance suggest that the homebuilding industry remains in good health, though high mortgage rates continue to challenge growth and margin expansion.