Republican Tax Plan Does Not Worry KB Home

The angst may already be fading away.

Last week, I chronicled the carnage across the stocks of home builders that erupted in response to the Republican plan for tax reform that includes a reduction in the cap on the mortgage interest deduction. The sell-off that likely had roots in the extreme displeasure emanating from the National Association of Home Builders (NAHB). Now one builder has stepped forward to brush off the dust: KB Home (KBH).

In the company’s investor presentation yesterday (November 7, 2017) – cleverly named the KB Home Returns-Focused Growth Plan Update Conference Call – management explained that its ASP in California is not significantly above the tax plan’s $500K cap. Moreover, $500K homes are not a “majority” of its business. Indeed, management emphasized that it is “not overly concerned.” These claims came in response to an analyst question during Q&A. Management chose not to discuss the potential implications of the tax plan during the presentation. I think this conference call was one of the FEW times I have heard a home builder that sells homes in a richly priced market reassure investors that its pricing is not all that high!

KBH’s target customer in most markets is not likely to be impacted by the tax plan. KBH focuses on first-time home buyers who have been about 60% of deliveries over the last 10 years. KBH targets affordability for the median household income of its served sub-market.

KB Home broke out ahead of its investor conference call. Post tax plan sellers were never able to break the stock down out of its previous range of consolidation.

Source: FreeStockCharts.com

At the same time KBH downplayed its expensive price points in California, the company reaffirmed its bullishness on its Californian market. The inland areas in particular are so strong that they are driving ASPs downward. This dynamic tells me that the California housing market has likely entered a new phase where the strong economy ignited strong housing demand from households looking for more affordable places to live.