Story Stocks^®

KB Home (KBH) narrowly surpassed subdued 2Q25 EPS expectations, supported by $200 mln in share repurchases during the quarter, but revenue declined by 10.5% yr/yr to $1.53 bln and home deliveries slid by 11% to 3,120 units. The revenue and home delivery declines reflect broader industry challenges, as affordability constraints -- exacerbated by mortgage rates near 7% -- and weakening consumer confidence continue to suppress demand.

Lennar’s (LEN) Q2 earnings on June 16 underscored these headwinds, with an EPS miss and bearish Q3 guidance, signaling persistent pressure across the homebuilding sector as buyers hesitate amid economic uncertainty and elevated borrowing costs.

• KBH’s downwardly revised FY25 guidance is the primary driver of today’s stock pressure, with housing revenue now projected at $6.3–$6.5 bln, down from $6.6–$7.0 bln. The average selling price forecast was also trimmed to $480,000–$490,000, reflecting a cautious pricing strategy to balance affordability and profitability. CEO Jeffrey Mezger cited softening market conditions as a key factor.
• To stimulate sales, KBH has leaned on incentives, including mortgage rate buydowns and price adjustments, which have eroded pricing power and contributed to the reduced outlook. These concessions, alongside higher land costs, are squeezing margins, aligning KBH’s challenges with industry peers navigating a sluggish housing market.
• On that note, housing gross profit margin has become a key metric for KBH and its peers. In Q2, housing gross profit margin declined to 19.7%, down 150 basis points from 21.2% in the prior-year period, reflecting weaker pricing power, increased incentives, and elevated land costs. The company also lowered its FY25 housing gross profit margin guidance to 19.0–19.4%, signaling ongoing pressure from lower ASPs and concessions like mortgage rate buydowns, which were noted as significant in Q1.
• While KB Home has achieved some cost efficiencies, such as reduced construction times and lower direct costs, these have been insufficient to offset the impact of a softer market and competitive pricing strategies.

Expectations for KBH’s Q2 were already tempered, evidenced by a 19% year-to-date stock decline, as investors braced for continued housing market weakness following Q1’s disappointing results and LEN’s cautious outlook. The company's lowered outlook amplifies fears of a prolonged and deeper downturn in the new housing market, with persistent affordability issues and softening demand likely to further compress margins and earnings through 2025. KBH’s disciplined capital allocation and strong balance sheet provide some cushion, but near-term challenges remain formidable.