It is all in the "W"

Summary:

KB (NYSE:KBH), a lower cost builder, is benefitting from the perception that we have hit the bottom. We have not. Thus, the peak of the inside of the "W" is about to wane.

Analysis:

KB is benefitting form a few things; namely, KB is a builder of less expensive and/or "starter homes". Thus, they benefit tremendously from the tax incentives that the Obama Administration created, the easing lending standards/rates for FHA loans and the increased lending limits for conforming loans, the perception of diminishing inventory of lower priced homes, and the de facto overall reduction of new building. All of these factors have postured KB and their business model to benefit from the inside/upward slope of the "W" recovery...if in fact we are in a recovery? I would not pull out the hammers and construction crews yet!
There is the "Alt A" mortgage crisis about to hit and the resulting inventory surge is going to create huge challenges to home builders and the overall economy. The inside/downward slope of the "W" is about to hit. Of course, no one knows how many foreclosures will be coming to market in the next three years, but we are finally hearing writers and analysts acknowledge that the "Alt A" crisis exists, and with it the very real proposition that home prices will still decline further. Declining values will equal more problems for all builders, including KB. We will simply have too many homes on the market to leave room for new
construction.

Joe Chatham
President
Chatham Mortgage Partners Inc.
805-496-3000 x1