Those buyers had agreed as a condition of their purchases to go through binding arbitration if they had a dispute, according to the original suit filed in 2003. Binding arbitration is a common clause in builders' contracts.

"You now have a precedent set in state court whereby the binding arbitration clause can be nullified for any home since 1996," said Janet Ahmad, president of Homeowners for Better Building, a San Antonio-based consumer group.

She called the settlement a "huge victory" for consumers. Ahmad said arbitration is often unfair to homeowners.

An Austin attorney for KB Home did not return a phone call seeking comment Wednesday afternoon. A representative of the Houston attorney for the homeowners said both sides were unable to comment.

Under the terms of the agreement, thousands of people who have bought a KB Home since Jan. 1, 1996, will be mailed information in the next month about the settlement.

A final hearing on the settlement is set for May 16 at the 341st District Court in Webb County, according to court documents.

Texas homeowners who have problems with their builders will still have to go through the Texas Residential Construction Commission before they can proceed with a lawsuit or arbitration, according to a commission spokesman.