KB Home’s Shares Hit New High on Continuing Boom

The stock of KB Home reached a record high Tuesday on the strength of speculation that declining mortgage rates would sustain the hot housing sector.

KB Home, along with other publicly traded builders, has been among the biggest beneficiaries of the booming housing market. Persistently low mortgage rates, high demand and rising home prices have driven steady earnings and revenue growth. KB Home’s profit rose 30% in 2004 from 2003.

Shareholders too have seen rewards. KB Home’s stock price is nearly eight times its level of five years ago, after adjusting for a stock split. On Tuesday, shares of the Westwood-based builder rose $1.28, or 1.9%, to $67.54.

The company, which built more than 31,000 homes last year, is the second-largest builder in California. Its average home price was around $450,000 last year, a 15% jump from the year before.

Yet KB Home Chief Executive Bruce Karatz acknowledged Tuesday that, at least in California, home-price appreciation probably would moderate.

“It would be foolish to think that values can continue to increase forever at the clip they have been in the last couple of years,” Karatz said. “It’s reasonable to anticipate a deceleration in housing prices.”

Still, he said, “I have very little reason to believe that we’ve got any serious problems ahead of us in California real estate prices.”

The company’s latest stock surge was fueled Tuesday when the yield on the 10-year Treasury note dipped to 3.98%, its lowest level since October. Lower yields usually mean lower mortgage rates, and lower rates make financing a home purchase more affordable to more consumers.

Thirty-year mortgage rates have been below 6% for much of the year, despite the Federal Reserve’s policy of measured increases in short-term interest rates. On Tuesday, the average rate on the 30-year, fixed-rate mortgage was 5.65%.

“Everyone has been expecting the sky to fall,” said Stephen East, an analyst with Susquehanna Financial Group in Bala Cynwyd, Pa. But mortgage rates “are pretty much in the same place as last year.”

East said he expected builders to continue to grow, “albeit at a much slower rate.” He rates KB Home stock as “neutral,” citing its concentration in California, Las Vegas, Arizona and South Florida -- markets he sees showing signs of a bubble.

Today, many of the nation’s top builders are gathering for their annual West Coast conference in San Francisco. Like a year ago, much of the talk is expected to focus on the specter of rising rates and slowing home prices.

All the publicly traded builders “have a done a good job while they have the wind at their backs,” East said. “It will be interesting to see when they don’t have that.”