KB Home Navigates a Softer Housing Market With Caution and Capital Discipline

KB Home’s second-quarter earnings highlighted both the resilience and headwinds of the U.S. housing market as affordability challenges and elevated mortgage rates weighed on demand. While the homebuilder managed to beat expectations on revenue and earnings, a meaningful downshift in orders and guidance painted a cautious picture for the rest of fiscal 2025. Against a backdrop of weaker seasonal demand and declining average selling prices, KB Home is leaning into operational improvements, flexible pricing, and shareholder returns to maintain stability in an increasingly uneven market.

For the second quarter of fiscal 2025, KB Home reported revenue of $1.53 billion, above the consensus estimate of $1.506 billion. Adjusted earnings per share came in at $1.50, also beating the Street's $1.46 forecast. The company delivered 3,120 homes in the quarter, a year-over-year decline of 11%, with an average selling price of $488,700. Gross margins came in strong at 19.7% excluding land charges, above the high end of prior guidance. However, homebuilding operating income of $131.5 million missed expectations of $142.6 million, indicating some cost and mix pressures beneath the surface.

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The biggest disappointment came from net orders, which fell 21% in dollar terms compared to Wolfe Research’s forecast for a 10% drop. ASP on new orders declined sequentially by 410 basis points, with every region showing negative quarter-over-quarter pricing trends. This reflected a combination of geographic mix and adjusted base pricing in underperforming markets. Despite improved build times and solid gross margins, KBH acknowledged a softer spring selling season, attributing the order weakness to macro uncertainty and declining consumer confidence—particularly during April, when sentiment reached a 13-year low.

In response to the demand slowdown, management revised its full-year fiscal 2025 guidance. Housing revenue is now expected between $6.3 billion and $6.5 billion (down from $6.6–$7.0 billion prior), with gross margins projected in the range of 19.0% to 19.4%, and homebuilding operating margins between 8.6% and 9.0%. For the third quarter, KBH guided to revenues of $1.5–$1.7 billion, ASPs between $470,000 and $480,000, and gross margins (excluding charges) of 18.1% to 18.7%. SG&A, which rose to 10.7% of housing revenue in Q2, is expected to remain elevated in the near term due to lagging overhead leverage and planned investments in repositioning communities.

Still, management emphasized flexibility. CEO Jeffrey Mezger cited improving build times and tighter control of direct costs as key operational wins, while President and COO Robert McGibney noted that KBH exceeded its delivery guidance thanks to more efficient construction timelines. CFO Robert Dillard outlined how the company is adjusting headcount and cost structure to align with the lowered revenue base, with a longer-term goal of bringing SG&A back below 10% as volume scales.

One clear shift this quarter is in capital allocation. KB Home repurchased $200 million of its stock during Q2, nearly 8% of its average diluted share count, and signaled continued commitment to buybacks with $450 million remaining in its authorization. Simultaneously, the company is pulling back on land investment, walking away from 9,700 lots that no longer meet underwriting criteria and reducing acquisition spend in light of softening demand and inflated land costs. Management stressed that sellers are beginning to show more flexibility, which could present better opportunities later in the year.

Looking ahead, investors should closely monitor several dynamics. First, any change in interest rate expectations—particularly if the Fed moves to cut later this year—could alter mortgage affordability and improve sentiment. Second, municipal delays and utility sign-off issues are an ongoing operational headwind, especially in markets like Sacramento and parts of Florida. Third, the resale market’s rising inventory may continue to compete with new homebuilders on both pricing and immediacy. Finally, KBH’s ability to maintain its gross margins in the face of order ASP compression and rising land costs will be a key metric to watch.

Despite the lowered full-year outlook, analysts like Evercore remain constructive on the long-term setup, citing double-digit EPS and book value per share growth potential in FY26 even if market conditions remain tepid. Wolfe Research, by contrast, remains more cautious, trimming its price target and warning that margin expectations for Q4 may be too optimistic given order trends and cost inflation.

Ultimately, KB Home’s Q2 results reflect a housing market that is digesting the impact of affordability pressures, higher-for-longer interest rates, and macro uncertainty. But the company’s disciplined response—via flexible pricing, leaner land strategy, and shareholder-friendly capital allocation—has positioned it to ride out the turbulence. While Q3 may bring more headwinds, the longer-term thesis hinges on execution, improved market conditions, and careful cost containment.