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KB Home shares jump after solid earnings report

KB Home led a rally in homebuilder share prices in early trading March 23 after reporting a solid start to the spring selling season amid rising interest rates.

The company reported earnings for its fiscal first quarter, which ended February 28, after trading closed March 22. Its share price opened 9.2% higher the next morning before giving back some of those gains as the day progressed. As of 12:10 p.m., the SNL U.S. Homebuilders Index was up 0.90%.

In its earnings release, the company reported a year-over-year rise in net order value of 8% on an 8% increase in new orders. In a subsequent conference call, Chairman, President and CEO Jeffrey Mezger said the spring selling season, which traditionally begins in late January, was off to a strong start, according to a transcript.

The 8% rise in new orders for the full first quarter represents a deceleration from a 14% year-over-year acceleration that the company reported in January for the first five weeks of the period. Mezger said that pullback was intentional, with KB moderating its sales pace by pushing prices higher where possible. So far, the company has not faced pushback from customers in response to higher prices, he added.

In an interview, MKM Partners analyst Megan McGrath said homebuilders' share-price gains represented a "relief rally" in response to a solid earnings report.

"The stocks have sold off in the past two months as mortgage rates have crept up" — to an average of 4.45% for 30-year fixed-rate mortgages for the week ended March 22 — "so there's been a lot of fear in the investment community about what that means for housing sales," McGrath said. Adding to the concerns for homebuilders, she added, are high costs for labor and building materials.

Thirty-year mortgage rates most recently bottomed out at 3.78% in the week ended Sept. 14, 2017, according to Freddie Mac. Homebuilder executives have not yet said publicly that their rise since then has affected buyer behavior, but stocks have traded down recently as investors have waited for some negative commentary, McGrath said.

"There are plenty of positives to the housing market," she said. "We're still building below long-term averages, the economy's growing, incomes are growing, inventory is low. There's a lot that points to good things for the builders. The big negative is that rates have spiked. I think yesterday's report is giving some hope that OK, at least so far, we're kind of powering through the higher rates."

Nevertheless, McGrath said volatility in homebuilder shares will likely persist in the near term, either until rates stabilize or until the spring passes without a notable fall-off in buyer demand.