KB Home reported its second quarter results today, and I thought I’d call some attention to the messages coming from the asset supply-side of the business:
â€œOur second quarter results reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand,â€? said Jeffrey Mezger, president and chief executive officer. â€œHousing affordability challenges and tighter credit conditions in the subprime and near-prime mortgage market have also exacerbated current market dynamics, keeping prospective buyers out of the market, slowing the absorption of excess supply and further delaying a housing market recovery. Pricing pressure intensified in many of our markets during the second quarter, compressing margins and requiring inventory impairment charges in certain of our communities. While we cannot predict when market conditions will improve, we remain committed to our operating disciplines, prudent fiscal decision-making and strategies that enhance our financial flexibility to navigate the current tough market environment.â€?
I think the most telling part here is Mezger’s admission that they have no idea when conditions will improve. KB Home’s second quarter, by all accounts, was a bloody one: earnings swung to a quarterly loss and revenues dropped 36 percent, while orders dropped 3 percent, prices slid 8 percent, and cancellations came in at 34 percent. On the plus side, it looks like the company is taking at least some steps to work through an inventory glut — the number of homes in inventory dropped 39 percent. From a supply-side perspective, I don’t think we’ll see things get better until inventories — and in particular, existing property inventory levels — come into line with current market conditions.