Updated from 10:12 a.m. ESTHomebuilder stocks tumbled Tuesday after KB Home ( KBH) reported a $773 million quarterly loss and new data showed pending home sales fell more than expected in November. KB Home's fourth-quarter loss resulted from ongoing weak demand and plummeting margins, as land impairment charges and tax expenses came in higher than analysts projected. KB Home shares were down 8.6% to $16.89 in midday trading, hitting a 52-week low Other builders tumbled on the reports as well, with Meritage Homes ( MTH) dropping 11.9% to $10.11 -- also a 52-week low -- and WCI Communities ( WCI) falling 8.8% to $3.34. KB Home's quarterly loss amounted to $9.99 a share, compared with a loss of $49.6 million, or 64 cents a share, a year earlier. Analysts expected a loss of $1.08 a share. The Los Angeles-based builder said revenue fell 31% to $2 billion, reflecting the ongoing difficulties of getting buyers to close on their new home purchases. KB Home also said 2008 will be "another tough year" for the homebuilding industry. Also on Tuesday, the National Association of Realtors said its pending home sales index fell 2.6% in November from October -- worse than the 0.5% decline that economists expected, according to Reuters estimates. The index measures contracts of existing home sales.
"We expect further modest declines in pending sales in the coming months as buyers continue to wait for home prices to bottom, although further price cuts should begin to lure some buyers off the sidelines," Bank of America analyst Daniel Oppenheim said in a research note. KB Home's bottom line was slammed by $403 million of land impairment charges. The company also recorded a $373.7 million income tax expense, even though the company lost money on a generally accepted accounting principles basis. This charge mostly relates to a reserve allowance against KB Home's deferred tax assets -- meaning the company must create an accounting entry to allow for the chance that it cannot carry unused tax deductions into the future. "The inventory impairment charges we incurred during the housing downturn have produced substantial deferred tax assets," KB Home CEO Jeffrey Mezger said. "To the extent that we generate sufficient taxable income in the future to utilize the tax benefits of the related deferred tax assets, we expect to see a reduction in our effective tax rate as the valuation allowance is reversed." The company's new orders in the quarter fell 32% to 2,574 units. The cancellation rate on previous orders measured 58% -- the same level as a year ago, but up from 50% in the third quarter.
Because of the large quarterly loss, KB Home said it was required to obtain a waiver under its revolving credit facility because it violated a tangible net worth covenant. Financing concerns are becoming a growing issue for the homebuilding industry as losses mount. Late Monday, D.R. Horton ( DHI) said it had amended its credit facility for the third time to allow for ease of covenant compliance. "As cash remains hard to come by and earnings continue to be elusive, we believe that the current fate of the homebuilding sector to a great extent rests in the hands of the banks at the moment," said CreditSights analyst Sarah Rowin in a research note to clients. The amendment came at a cost to Horton, as the credit line was reduced and the company was subjected to "more punitive pricing," Rowin wrote. "We caution that DHI's decision to amend the provision -- despite maintaining a reasonable cushion -- now could be a symbol of the company's continued expectations of further impairment charges down the road," she added. D.R. Horton shares recently were down 2.8% to $10.65.