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Less than one week after competitor Lennar (LEN) issued soft 2Q25 EPS and deliveries guidance, KB Home (KBH) reported downside 1Q25 results and lowered its FY25 housing revenue outlook, providing further evidence of an intensifying housing market slowdown. Similar to LEN, KBH experienced lower than expected demand as the spring season began to unfold with high mortgage rates and rising macroeconomic uncertainties mainly to blame. Once again, KBH relied heavily on incentives such as rate buy downs in order to stimulate demand, putting pressure on margins and EPS, which decreased by 15% yr/yr to $1.49.

• Homes delivered decreased by 9% to 2,770, missing analysts' estimates, reflecting the muted spring demand and delayed community openings due to the wildfires in Southern California. Mortgage rates have hovered in the high-6% range causing affordability issues, but another headwind has emerged. Buyers are taking longer to make decisions now, resulting in lower absorption rates early in the quarter. The good news is that net orders began rebounding after a mid-February pricing adjustment, but KBH's reduced FY25 housing revenue forecast of $6.60-$7.00 bln (from $7.00-$7.50 bln) is clouding over that development.
• Housing gross profit margin has become a closely watched metric in the homebuilder industry as companies ratchet up costly incentives to support demand. Last quarter, KBH reported a surprise 20-bps bump in adjusted housing gross profit margin to 20.9%, bolstered by lower building costs and pricing discipline. Although direct costs were lower again in Q1, and average selling price (ASP) was up 4% yr/yr to $500,700, adjusted housing gross profit margin slipped lower this time, contracting by 130 bps yr/yr to 20.2%. A combination of homebuyer concessions, higher land costs, and reduced operating leverage weighed on margins.
• KBH has done well to protect ASPs, but the affordability issues and slipping consumer confidence levels are now taking too big of a toll. Therefore, the company is anticipating ASPs to fall to $480,000-$495,000 in FY25 due to selective price adjustments, down from its prior guidance of $488,000-$498,000. Likewise, KBH anticipates FY25 housing gross profit margin in the range of 19.2-20.0%, down from its prior outlook of 20.0-21.0%.
• From a longer-term perspective, the same positive dynamics that have been in place for many years still remain, including favorable demographics, the chronic undersupply of available homes in the U.S., and the accumulated wealth built up from home price appreciation. Once mortgage rates do decline, KBH should see a potent upswing in the market.

KBH's Q1 results revealed weaker-than-expected demand during the start of the spring selling season as consumer confidence declined and buyers hesitated to make purchases due to high mortgage rates. To stimulate sales, the company once again implemented price reductions and increased incentives, which helped drive late-quarter order improvements, but also pressured margins and reduced profitability.