Builders Still No Bargains

"I don't think anybody, including the builders themselves, has any good idea as to what 2007 looks like."

On its earnings call last week, KB Home management was asked about whether this year or future years would see the biggest margin impact from land expenses. Jeffrey Mezger, the company's chief financial officer, said this year is "probably the largest year for land going up." Finished lot costs will rise 20% at the company this year, he said, and 7% housing price increases are needed to cover such land costs. "That's coming down significantly next year," he added.

The company didn't respond to a call seeking more information. Like most builders, KB Home doesn't specifically break out how much land it purchased in recent years.

East believes KB Home's management that this year is likely to be the worst in terms of the impact from land expenses. One reason he cites is that the average age of KB Home's owned land is two years or less, by his estimate. Since 2004 and 2005 represented the biggest year-over-year jumps in land prices, such lots are just now hitting the company's income statement.

"I think once we get into '08, that situation moderates pretty meaningfully for most builders," East says.

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