What KB Home Earnings Will Say About Homebuilders' Prospects

KB Home will release its quarterly report on Tuesday, and investors have been bracing themselves all quarter for a potential reversal of the fundamental strength the homebuilder has shown over much of the past year. What we see in KB Home earnings could have dramatic implications for the entire homebuilder industry, especially as peers Hovnanian and Standard Pacific face many of the same conditions as KB Home.

The big boost in homebuilder stocks during much of 2012 and early 2013 came from a long-awaited rebound in home prices and a rise in buying activity. Yet with would-be home-buyers now facing more expensive financing for their purchases, industry followers have expected sales volumes to decline and for KB Home and its peers to face new challenges in doing business. Let's take an early look at what's been happening with KB Home over the past quarter and what we're likely to see in its report.

Stats on KB Home

Source: Yahoo! Finance.

Can KB Home earnings build a strong foundation this quarter?
Analysts have actually gotten a lot more optimistic about KB Home earnings in recent months, boosting their August-quarter estimates by $0.08 per share and adding 60% to their full-year fiscal 2013 projections. The stock, though, has gone in the opposite direction, falling 17% since mid-June.

The big cause of the drop in KB Home shares came in late June, when the Federal Reserve started discussing plans for how it would reduce the level of its bond purchases under quantitative easing. QE has done a lot to keep mortgage rates down, and so fears of its potential end sent those rates soaring, increasing monthly payments for new home-buyers. In the second quarter, home affordability dropped to its worst levels since late 2008, pressuring KB Home and its peers.

In particular, certain cities in the California market, including Los Angeles, San Francisco, and San Jose, are among those most vulnerable to a shift to renting rather than buying. KB Home and Standard Pacific are both based in California, leaving them particularly exposed to any adverse trend there. Yet Hovnanian and several other national homebuilders also have a substantial presence in the California market.

Still, fears about a slide in home sales haven't yet appeared in KB Home's results. Back in June, the company reported a 25% jump in KB Home's average selling price and a 39% jump in home deliveries. Similar strength from rival Lennar confirmed the trend, as Lennar saw a 36% jump in deliveries as well. Perhaps more importantly, KB Home saw its backlog grow 6%, and while that's not as quick a gain as homebuilders saw in the past, it nevertheless points to demand from would-be homeowners to buy.

In the KB Home earnings report, watch the numbers to see how higher rates have affected sales. But also, go beyond those numbers to look for guidance on how KB Home's recent land purchases are defining its strategic vision for the future. Being smart about growth could save KB Home from the punishment it took following the housing bubble of the mid-2000s.

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The article What KB Home Earnings Will Say About Homebuilders' Prospects originally appeared on Fool.com.

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