KB Home Stock Down – Can Martha Stewart Help?
Stock continues to decline, down $21.17
Has KB Home teamed up with Martha Stewart in hopes of improving what appears to be a concern for its image? Last week on October 12, 2005  KB Home (KBH) and Martha Stewart Living Omnimedia Inc. announced that they were entering into an agreement to collaborate on homes. But is Martha’s influence the answer to the woes of KB Home’s decline in the market, or will allegations of building defective homes continue to be an escalating obstacle to overcome? At the close of business Friday, KB Home stock closed at $64.28, representing a decline of $21.17 in the past 3 months.  Related article:KB Home Stock Down $10.95 – Foreclosures are up

KB Home Stock Down – Can Martha Stewart Help?
Stock continues to decline, down $21.17
October 21, 2005
 

Has KB Home teamed up with Martha Stewart in hopes of improving what appears to be a concern for its image?  Last week on October 12, 2005   KB Home (KBH) and Martha Stewart Living Omnimedia Inc. announced that they were entering into an agreement to collaborate on homes.  But is Martha’s influence the answer to the woes of KB Home’s decline in the market, or will allegations of building defective homes continue to be an escalating obstacle to overcome?

At the close of business Friday, KB Home stock closed at $64.28, representing a decline of $21.17 in the past 3 months.

The first-time homebuyer’s market elevated KB Home to one of the largest, most profitable homebuilders in the nation, while the company has been the target in a number of federal investigations since 1979.  In recent years there have been a growing number of public protests by unhappy homeowners, claiming their homes were defectively built and that KB Home failed to make repairs under the warranty. There have been allegations that homes were built on contaminated land, including a subdivision Texas where homeowner were outraged at bombs found in their yards. 

KB Home stock reached a new 52-week high of $85.45 on July 7, 2005 , but since then the stock has been on its way down.   A month later, following back-to-back fines by the Department of Housing and Urban Development (HUD) of $3.2 million, and the Federal Trade Commission (FTC) of $2 million, for financing irregularities and alleged federal court order violations, KB Home stock fell to $74.50 on  August 5, 2005 .

Insider stock sales
Stocks continued the decline after a New York Times article (October 4, 2005) by Julie Creswell reported that executives and directors at many of the nation's largest development companies, including KB Home, had sold stock at a record pace. Ten of the largest home builders had sold nearly 11 million shares worth $952 million.  The New York Times article reported the following: “Market specialists often view heavy stock sales by corporate insiders as a possible indicator that share prices are headed lower. Some analysts say that the share sales by home builders are reminiscent of the heavy dumping of stock by technology company executives just before the technology bubble burst in 2000. For that reason, the staggering level of insider sales has analysts and investors wondering if home builders see something menacing on the horizon, like a cooling of the real estate market.” 

Then on October 8, 2005 , KB Home was the subject of an ABC 20/20 segment featuring angry homeowners shocked at discovering bombs in their yards and that their homes were built on an old military bombing range.  The US Corps of Engineers has just completed a bomb clean-up of the neighborhood costing taxpayer’s $1.9 million.  See Southridge Fact Sheet that gives an historical account of the old Five Points military bombing range.

Prompted by a flood of complaints and news media reports for the past four years ago, HUD and the FTC began their inquiry of KB Home for its questionable building and business practices.  As a result of the investigations the (HUD) imposed its fine, citing irregularities in KB Home mortgage lending practices as the reason for its action. 

Then on  August 3, 2005 , KB Home agreed to pay a $2 million penalty.  They also agreed to a modified consent decree.  The FTC Press Release stipulated the following:  “The modified consent decree, which replaces the consent decree entered in 1991, resolves the Commission’s allegations that KB Home violated the prior order. The order enjoins KB Home from violating the 1979 consent order and requires KB Home to: 1) modify the dispute resolution provisions of existing warranties to comply with the 1979 order; 2) comply with the warranties as so modified; 3) extend for one year the two-year warranty coverage for major home components for homeowners whose homes were delivered during 2002 through 2004; and 4) reimburse homeowners for fees they had to pay to arbitrate warranty disputes in alleged violation of Part III.B of the order. In addition, the decree will require KB Home to pay a civil penalty of $2 million to settle the Commission’s charges that it violated the order.” 

The question is, Will the collaboration by Martha cure the ripple effect of KB Home’s previous business decisions?   Will it circumvent the much-predicted real estate bubble or cure past construction defects that continue to trouble KB Home?