KB Home's Q4 And Fed Connection: Cramer Says Jerome Powell Has to Be Happy With The Numbers

KB Home KBH reported on Wednesday fourth-quarter results that trailed consensus estimates, sending its shares lower in after-hours trading.

What Happened: KB Home’s results should go down well with Fed Chairman Jerome Powell, CNBC “Mad Money” host Jim Cramer suggested late on Wednesday. “Jay Powell has to be happy about those KB Homes numbers: tons of chatter about big home price cuts from competitors and lower costs per home!!” Cramer tweeted.

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Cramer was apparently referring to the thawing in house prices after the Fed’s aggressive fed funds rate hikes drove them higher in 2022. The central bank, which pursued an ultra-loose monetary policy in the wake of the COVID-19 outbreak in early 2020, began normalizing rates two years later.

Beginning with March 2022, the Fed hiked rates in each of the monetary policy meetings on account of which the policy rate is now at 4.25%-4.50%. This benchmark rate serves as a reference point for all interest including the mortgage rate, which is key for the housing market.
The 30-year fixed rate mortgage rate has doubled from the start of 2022 to 6.52% currently, which has pushed up home prices and, in turn, exerted a downward influence on demand.

The median existing-home sales price rose 3.5% year-over-year to $370,700 in December, the National Association Of Realtors said in its recent report. This, according to the association, was the 129th consecutive month of year-over-year increases, marking the longest-running streak on record.

What KB Home’s Q4 Tells: KB Home said its third-quarter revenue climbed 16% to $1.94 billion, as home deliveries rose 3% and average selling price climbed 13% to $510,400. ASP for the year rose a steeper 18% to $500,800.

The company guided to first-quarter average selling price of $490,000 to $500,000, which is down from 2022 levels.

Citing significant uncertainty and limited forward visibility regarding the 2023 housing market, and macroeconomic and geopolitical conditions, the company issued only 2023 housing revenue guidance.

Sharing anecdotal evidence, KB Home chief operating office Rob McGibney said on the earnings call that the company’s competitors in Austin, where it has a community, are discounting or incentivizing their speculative inventory by $60,000 to $70,000.

Why It’s Important: Declines in house prices will likely bring down inflationary pressure, providing leeway for the Fed to slow down rate hikes or even pause and pivot. It also has the potential to stimulate housing demand, which, in turn, could prove healthy for economic growth.

Data from the National Association of Home Builders show that housing’s contribution to GDP, considering residential investment and consumption spending on housing services, is at roughly 3-5% and 12-13%, respectively, of total U.S. GDP.

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