For years, KB Home built its identity on customization, but an industry-wide pivot to spec sales amidst the throes of the COVID-era building boom eroded that edge.
After several quarters of a hard strategic shift back to the business model it knows best and has practiced most, KB Home reengineered its build-to-order mix to historical levels. In doing so, KB has pushed margins higher in the process.
KB Home’s pullback from spec sales evidences a willingness to trade off market share, at least for now, in exchange for stronger margins, a move that exposed both pluses and minuses in the company’s Q3 2026 earnings call held Tuesday post-market close.
Compared with a year ago, revenue dove 20%, largely tied to KB Home’s 19% decline in deliveries to 2,732 homes. Homebuilding operating income also fell nearly 50%. Sales are slower, and the builder’s average selling price was $473,000, down slightly from $475,700.
Margins also compressed annually, from 18.2% to 16.5%.
However, this benchmark reflects quarter-to-quarter increase from 15.2% in Q1 and 15.2% in Q2. The recent margin U-turn suggests that the builder’s heavier emphasis on BTO homes, which typically come with much stronger margins, may be beginning to pay off.
Still, KB Home’s decision to lower Q4 margin and sales price guidance overshadowed the quarterly margin improvement, pushing the company’s stock down Wednesday. It’s a concrete indication that the builder’s consumers, about half of whom are first-time purchasers, are weighed down by hard-to-overcome affordability constraints and an indefinite future of economic uncertainty.
KB’s consumers remain wary
During their earnings call last week, Lennar executives said housing market conditions have grown more difficult in recent months, citing rising mortgage rates, high gas prices, persistent inflation, low consumer confidence and geopolitical uncertainty as factors burdening buyer demand. At the same time, increased competition from the resale market has cropped up as another headwind for new-home sales.
KB Home leadership echoed those concerns on Tuesday, pointing to the same headwinds as factors keeping buyers on the sidelines. The builder reported that sales weakened as the past quarter progressed, with resiliency in June followed by softer conditions in July and August.
Demand, it is widely believed, is there. The problem is getting buyers to commit at a moment when making the monthly payment math work is more difficult for more would-be buyers.
“There are a lot of people out still looking for homes. They are just cautious, and there are a lot of things going on right now that they are trying to digest,” Rob McGibney, President and CEO of KB Home, said during the call. “Even since the end of our quarter in August, rates have ticked up 20, 30 basis points, and every time you get a little movement like that, it takes time for the consumer to digest it.”
Many buyers are in wait-and-see mode, with many “on pause” for the moment as they wait, perhaps optimistically, for conditions to improve.
“[Buyers] do not want to feel like they overpaid for a house because they bought at the peak of the rates,” McGibney said. “So, they wait to see if rates are coming back down and they digest the rate move.”
Heightened competition from the resale market has reemerged in full swing, with sellers in most markets now far more willing to concede on prices or other concessions to get buyers to close.
“I think we’re starting to see the sellers, the resale homeowners, get a little less patient…and starting to adjust [pricing]. So overall, I would agree resale levels have generally come up. It’s becoming more of a formidable competitor than it’s been over the last several years,” McGibney said.
The factors, working together, have slowed sales. Under normal conditions, KB Home expects around 4.0 sales per community per month. Last quarter, the builder averaged 3.1 sales per community per month.
“We’re trending below that [level] this year. We certainly have designs on getting back to that. With market conditions as choppy as they are, we’re not looking to force that at the expense of margin,” McGibney explained.
Building for buyers who have already committed
After KB Home reported its Q3 2025 earnings a year ago, executives laid out a game plan to reset a historical mix of at least 70% build-to-order (BTO) homes by working through existing spec inventory. KB Home reached that goal during Q2 of this year, with 73% of its orders coming from BTO Homes. During Q3, that share inched up to 74%, an increase from roughly 50% just a year prior.
This BTO strategy has multiple benefits. For customers, purchasing a BTO home allows them to lock in a loan mortgage rate a few months prior to moving into the home. So, a buyer who moved into their new home in September likely locked in their rates earlier in the summer when borrowing costs were lower. This strategy somewhat minimized the extent to which KB had to use incentives last quarter.
“The first approach that we take is we try to get everybody locked as early as possible. Sometimes buyers are not on board for that. They want to play the market and hope that rates come down, and we have seen in backlog some situations where we have had to make some minor adjustments, either just to keep them in the deal or to get them qualified. But it is minimal overall, especially when we can get them locked early and upfront,” KB Home Executive Chairman Jeffrey Mezger said.
From an operational standpoint, a BTO-heavy strategy allows for a more predictable backlog, therefore giving purchasing and procurement teams greater visibility when negotiating labor and material costs. It also helps builders maintain a steadier production pace and enables a gross profit margin that is roughly 400 basis points higher than the typical spec home.
For KB Home, this BTO strategy allows the builder to deliver homes, as McGibney put it, “for buyers who have already committed, not buyers we hope to find.”
At a time when buyers are less willing to commit, however, the strategy’s trade-off is showing up in fewer deliveries and net new orders. Still, the buyers who do commit are delivering substantially higher margins, which is part of the reason the company’s gross profit margin spiked up from the last two quarters.
“A market like this one tests what a business model is built on. Our built-to-order model was designed to perform in exactly these conditions, McGibney said.
Operational improvements aid the BTO strategy
KB Home, relying on value engineering and strong supplier relationships, slightly lowered its direct costs on started homes year-over-year. These cost improvements directly contribute to margin improvements.
However, faster cycle times may be the most important factor supporting KB Home’s BTO strategy. The average BTO home took 99 days from start to completion in Q3, a gain of 23 days, or 19%, faster than a year ago. Shorter build times allow KB Home to turn its backlog into deliveries more quickly, giving buyers a shorter wait.
“At just over three months, our buyers are not waiting long for a home built the way they want it, and they can more cost-effectively lock in their interest rate than they could when build times were longer. Faster build times also increase our inventory turns and make us a more efficient company. We are working toward a target of 90 days, with improvement from here expected to be more gradual, given how much progress we have already made,” McGibney said.
A tale of two Californias
Earlier this year, KB Home announced that it will move its corporate headquarters from Los Angeles to Phoenix in 2027.
However, the builder remains committed to the Golden State, with executives highlighting Northern California during its Q2 earnings call in June as a key area of strength, where multiple high-priced communities are generating strong margins. Northern California is still performing roughly as expected, with its projected Q4 average sales price (ASP) increasing modestly.
However, weaknesses in Southern California offset those gains. Slower-than-expected sales in Southern California have reduced the number of higher-priced homes forecasted to close in the quarter, and a less favorable mix of Southern California communities delivering in Q4 is also weighing on the outlook.
This regional weakness is expected to contribute to a projected $20,000 decline in company-wide ASP during Q4, exemplifying the impact that a single region can have on a builder’s overall performance, based on the builder’s concentrated operations.
Revised guidance is a sign of the times
On Tuesday, KB Home revised its guidance, primarily by lowering its expectations for Q4 average selling prices and full-year housing gross profit margin. The homebuilder now forecasts its full-year gross profit margin in a range from 16.0% to 16.2%, down from earlier guidance of 16.1% to 16.5%. This small, yet noteworthy decrease in margin expectations is another “tell” of the headwinds impacting builders as they enter the final stretch of the year.
“Market conditions have weakened since our last earnings call and remain challenging, with greater pressure on both demand and pricing than we had anticipated,” said William Hollinger, KB Home Chief Accounting Officer said when explaining the revised guidance.
For KB Home, reaching a 74% build-to-order mix represents a significant milestone, one that has already contributed to improved margins. The approach paid off last quarter, lifting profitability.
However, the real question may be whether build-to-order can still deliver if buyers grow ever more hesitant to commit before a shovel hits the ground, and how this strategy could pan out when conditions begin to materially improve.
