KB Home's Sales Slide Deepens as Mortgage Rates Near 7 Percent, Testing the Housing Market

KB Home, one of the largest publicly traded homebuilders in the country, reported Tuesday that fiscal third-quarter revenue fell 20 percent and deliveries dropped 19 percent from a year earlier, as mortgage rates approaching 7 percent and broader economic uncertainty pushed prospective buyers to the sidelines. The results, disclosed in a filing with the Securities and Exchange Commission, mark the builder's steepest quarterly sales decline since the market began cooling more than a year ago, and add to evidence that the Federal Reserve's rate campaign is landing hardest on housing even as other parts of the economy hold up.

The Los Angeles-based company still topped Wall Street's estimates on both the top and bottom lines, a combination that has become familiar this earnings season: builders trimming output and offering incentives to protect margins while volumes shrink. Shares of KB Home slipped in the trading session following the report, falling roughly 1.65 percent to $47.79 on volume more than three times the daily average, according to a summary of the market reaction published by StockTitan.

The numbers

For the quarter ended Aug. 31, KB Home reported revenue of $1.30 billion, down from $1.62 billion a year earlier. Net income fell 40 percent to $65.3 million from $109.8 million, and diluted earnings per share came in at $1.05, down from $1.61 but above analyst forecasts of roughly 89 cents. The company delivered 2,732 homes, a 19 percent decline, at an average selling price of $473,000, little changed from $475,700 a year earlier.

Housing gross margin narrowed to 16.5 percent from 18.2 percent, which the company attributed to pricing pressure, higher relative land costs and reduced operating leverage. Net orders fell 12 percent to 2,604, while the cancellation rate ticked up to 18 percent from 17 percent. Backlog nonetheless grew slightly, to 4,398 homes valued at about $2.05 billion, and the company ended the quarter with 277 active communities, up 5 percent from a year ago. KB Home also repurchased $50 million of stock during the quarter, bringing year-to-date buybacks to $175 million, and said $725 million remains under its existing authorization.

A market reshaped by higher rates

The results land against a backdrop of steadily rising borrowing costs. The average rate on a 30-year fixed-rate mortgage climbed to 6.95 percent as of Sept. 17, up from 6.76 percent a week earlier and from 6.26 percent a year ago, according to the weekly survey Freddie Mac publishes. That increase followed the Federal Reserve's decision on Sept. 16 to raise its benchmark interest rate a quarter point, to a target range of 3.75 percent to 4 percent, with the central bank citing elevated inflation even as policymakers described broader economic activity as expanding at a solid pace. Housing has borne a disproportionate share of the resulting strain, since new-home purchases are unusually sensitive to swings in financing costs.

Builder sentiment has followed mortgage rates lower. A separate survey of builder confidence released this month by the National Association of Home Builders found its index fell three points to 32 in September, the weakest reading in a year, with the group's chief economist, Robert Dietz, pointing to tight lending conditions and elevated land, labor and construction costs. The survey found 38 percent of builders had cut prices in September, up from 35 percent in August, with the average reduction holding at 6 percent for a sixth straight month, and 66 percent were offering sales incentives such as covering mortgage points or closing costs.

Builders squeezed, buyers cautious

The slowdown is reshaping how large builders operate. KB Home has spent much of the past year pivoting back toward a built-to-order model, in which homes are started only after a buyer signs a contract, rather than building speculative inventory ahead of demand; that approach accounted for roughly three-quarters of the company's deliveries in the third quarter, a shift trade publication HousingWire has tracked as builders recalibrate their exposure to a softer market. The strategy reduces the risk of being caught with unsold homes but also caps how quickly a builder can grow volume when demand is weak.

The effects extend well beyond KB Home's balance sheet. Prospective buyers face the highest sustained mortgage rates in roughly two decades layered on top of already-stretched home prices, a combination that has pushed many toward renting or delaying a purchase altogether. Construction workers and suppliers tied to the residential building trade are exposed to the slower pace of starts, while communities that rely on property-tax growth from new subdivisions may see that growth slow as deliveries fall.

Company executives framed the results as resilience within a difficult environment. Jeffrey Mezger, KB Home's executive chairman, said in the earnings release that conditions had "continued to be challenging."

"We are operating in a housing market that continues to be challenging, with conditions weakening since our June earnings report. Higher mortgage interest rates have further pressured affordability and, together with geopolitical uncertainty and broader economic headwinds, have caused many prospective buyers to be more cautious on purchasing a home."

Robert McGibney, the company's president and chief executive, struck a more operational note, saying the built-to-order shift and a wave of new community openings over the past year had supported a "sequentially higher housing gross profit margin" and would help underpin sales going forward, while the company continued "balancing price and pace for the best possible return."

What happens next

KB Home reaffirmed its full-year guidance, projecting 10,500 to 11,000 home deliveries, housing revenue of $4.90 billion to $5.10 billion, and a gross margin of 16.0 percent to 16.2 percent for fiscal 2026, which ends in November. That guidance assumes market conditions stabilize rather than deteriorate further over the final months of the year.

The broader trajectory will hinge substantially on the path of mortgage rates and the Fed's next moves. Investors and builders alike are watching for signs of whether the September rate increase marks the peak of the current tightening cycle or an intermediate step, with the central bank's next scheduled policy meeting set to offer further guidance. Other large builders are expected to report results in the coming weeks, and analysts will be watching whether KB Home's pattern — falling volumes, thinner margins, but reaffirmed guidance and reduced cancellation risk from the built-to-order shift — holds across the industry or whether smaller, less diversified builders face sharper pain. For now, KB Home's results offer one of the clearest single data points yet that higher-for-longer borrowing costs are working their way through the housing market, even as the company insists its underlying operations remain on track.