Home builder pulling out of region

KB says market in mid-Atlantic is too bad to continue

Wednesday, April 9, 2008

Click here to enlarge this photo Staff photo by GARY SMITH KB Home, which was building houses in the Middletown Woods subdivision in Waldorf, has begun transitioning out of the local real estate market. E-Mail This Article | Print This Story

KB Home officials said the move will help it hold onto cash reserves and ride out the housing crash.

The company’s decision came only about a week after the end of it's first quarter Feb. 29, in which it took a $267 million operating loss for excess housing inventory and terminated 53 percent of new home contracts, according to KB’s public earnings statement released recently. In the Washington metropolitan region, 17 full-time employees will be displaced until new positions are found for them in other parts of the country, said Lindsay Stephenson, a KB Home spokeswoman.

‘‘We evaluated market performance in the area and we had to make the decision to focus on areas that will allow us to grow our business and profits, given the current conditions in the real estate market,” Stephenson said. ‘‘We informed our employees and homebuyers on March 6 that we made the difficult decision not to invest in additional communities in the area and to make a gradual transition out of the market.”

The Los Angeles-based builder has five communities in the mid-Atlantic area under construction in Waldorf, Accokeek, Gaithersburg, Upper Marlboro, Leesburg, Va., and Alexandria, Va.

During the last year KB Home, which also has a mortgage unit, has lost 43 percent in total revenues since first quarter 2007. Its housing revenues this quarter fell 47 percent to $726 million. Last year’s first quarter housing revenues were over $1.3 billion.

There was also a 43 percent decrease in the number of homes delivered, and a 7 percent decline in the average selling price.

The company sold 2,928 homes at an average price of $248,200 in the first quarter of 2008 compared to 5,136 homes at an average selling price of $267,400 in the first quarter of 2007. In Waldorf, the company’s average sale price was in the $500,000 to $600,000 range; now the homes are selling for from $375,000 to $500,000.

The company’s backlog at the end of the first quarter was 4,843 homes and there were only 1,449 orders for homes – a 75 percent decrease since this time last year.

Jacob Hay, spokesman for the Laborers’ International Union of North America, which tracks trends in the construction industry, said KB Home’s decision to stop operating in the Washington, D.C., metropolitan region is a symptom of overzealousness during the height of the housing boom.

‘‘It is a reflection of poor performance, overextension and an admission that they have to downsize, and that certain markets are beyond their reach, either in simple terms of maintaining markets which they see as a priority or markets whose recovery seems beyond their horizons,” Hay said.

Between 2003 and 2006, 6.27 million new single-family homes were built to feed consumer demand in the U.S. Now, 5.5 million homes – over 600,000 of which are new homes – are sitting on the market.

Over the last year 232,000 construction jobs were lost as a result of the bust across the nation, 900 of which were in Maryland, 100 in D.C. and 5,200 in Virginia, according to a recently released LIUNA report.

While big builders are facing bigger losses than ever in recent history, they’re fighting to reclaim them, the report indicated. Homebuilder lobbyists are touting a three-year extension of the net operating loss carry-back for 2006 and 2007, which would allow homebuilders to claim losses on their taxes as far back as 2003 as part of the Foreclosure Prevention Act, according to the union report. The move could decrease U.S. revenues by $15 billion in 2008 alone.

‘‘Our first quarter financial results reflect the persistently challenging conditions in U.S. housing markets and the strategic measures we have taken over the past several months to streamline our land positions and reduce the number of communities where we operate,” said Jeffrey Mezger, president and chief executive officer of KB in a statement. ‘‘Our industry continues to confront a growing oversupply of new and resale homes, tight mortgage lending conditions and a highly competitive pricing environment. These conditions drove down sale prices and further compressed margins in the first quarter of 2008, prompting us to recognize additional impairment charges and abandon certain land option contracts that no longer made financial sense. Until prices stabilize and consumer confidence returns, we believe inventory levels will remain significantly out of balance with demand. We do not anticipate meaningful improvement in these conditions in the near term, as it is likely to take some time for the market to absorb the current excess housing supply and for consumer confidence to improve.”

Jonathan Benya, a Realtor with Century 21 New Millennium in Waldorf, said a client was upset when his KB Home contract was recently canceled for a new house in Waldorf’s Middletown Woods neighborhood.

‘‘They build a great product. It was impressive to me and impressive to my clients. Everyone’s waiting to see who the next builder to go under is,” Benya said.