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The homebuilding industry has shown some cracks in its foundation recently as stubbornly high mortgage rates have forced new construction companies to remain in a promotional mode in order to ease affordability headwinds, but KB Home's (KBH) better-than-expected Q4 results are providing the space with a much-needed boost. Buoyed by a healthy labor market and favorable demographics, demand for new homes was strong in Q4, as illustrated by KBH's 40% yr/yr increase in net orders in Q4.

With shares of KBH diving by 23% since the beginning of December, the stock was primed for a rebound and KBH's quarterly results and outlook helped ease concerns that business conditions are continuing to deteriorate for the company and the overall industry. However, KBH and others aren't out of the woods just yet as high mortgage rates are still presenting an obstacle.

• On that note, KBH stated during the earnings call that despite two interest rate cuts from the Fed totaling 75 basis points, mortgage rates actually increased from September to October, and then again in November. As a result, some potential home buyers held back on purchase decisions -- especially during the last two months of Q4 -- causing the company to fall short of its internal sales goal.
• This hesitancy has continued into Q4, putting some pressure on net orders. For the first six weeks of 1Q25, net orders are down by 12% yr/yr to 1,026, but KBH does expect net orders to pick up as it enters the stronger spring selling season. Furthermore, KBH has been able to improve its build times by an average of 28%, leading to a 17% jump in deliveries in Q4 to 3,978.
• Additionally, KBH held firm on its base prices -- average selling price rose by 3% to $501,000 -- while direct costs, such as lumber and concrete, also decreased in the closing months of FY24. These factors helped to offset the impact from incentives, including mortgage rate buydowns or locks, which were provided to about 60% of KBH's customers in Q4. Taken altogether, adjusted housing gross profit margin ticked higher by 20 bps sequentially to 20.9%.
• Encouragingly, the company anticipates housing gross profit margin to remain stable in FY25 at 20.0-21.0%, even as tariffs under the new Trump Administration potentially drive up the costs of U.S. produced materials. Through volume-based pricing, the company believes that it can offset the impact of rising costs from tariffs.

Overall, KBH's Q4 results and FY25 guidance were solid and reinforced the notion that the homebuilding industry is in relatively healthy shape, but persistently higher mortgage rates are still a barrier to stronger growth and higher margins.