KB Home Stock Down $33.86
Stock continues to decline from its 52-week high of $85.45
Wednesday, May 31, 2006 

At the close of business on Tuesday, KB Home’s (KBH) stock was down again, closing at $51.59 (-3.07%) representing a decline of $33.86 since its July 7, 2005 high.

The stock has lost significant ground over the past 10 months when it hit a high of $84.45 and building forecasts were bright. 

A steady decline began in late July 2005, 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 allegations of violations regarding a 1979 federal court order.

On August 5, two days after the FTC announcement of the $2 million fine, the stock had fallen by $10.95.  

Then on October 12, 2005 KB Home and Martha Stewart (Martha Stewart Living Omnimedia Inc.) teamed up announcing an agreement to collaborate on a new line of home decorating designs. However, Martha’s influence it appears was not enough to solve the woes of the homebuilder. The stock continued to lose ground and on October 21, 2005 it had declined by $21.17 closing at $64.28.

KB Home has grown to become one of the largest, most profitable homebuilders in the nation despite being the target of widespread negative news reports alleging construction defective and a number of federal investigations.

A Troubled Past
In recent years there has been a steady stream 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 of building homes on contaminated land and on October 8, 2005, the builder was the subject of an ABC 20/20 segment featuring angry Texas homeowners outraged at discovering bombs in their yards, and that their homes were built on an old military bombing range. The US Corps of Engineers however bailed out the builder by conducting a bomb clean-up of the neighborhood costing taxpayer’s $1.9 million, leaving some bombs buried under the homes.

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 HUD imposed its fine, citing irregularities in KB Home mortgage lending practices as the reason for its action. 

A newly modified August 3, 2005 FTC consent agreement enjoins KB Home from violating the 26-year-old federal order prohibiting it from restricting customers' rights to sue over construction defects and requires KB Home to: 1) modify the dispute resolution provisions of existing warranties to comply; 2) comply with the warranties as 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.

KB Home recently made headline again when a Texas court approved a class-action lawsuit which affirmed that homeowners can sue KB Home for construction defects.  The ruling prohibits KB Home from requiring past, present or future customers to consent to mandatory binding arbitration for the settlement of warranty claims.

Despite the federal action, negative press and decline in stock, the profitability of its chief executive officer has done well.  USA Today recently reported that KB Home’s CEO, Bruce Karatz earned $164 million in benefits in 2005.