Shawn Tully of Fortune magazine reports that KB Homes is reducing the sizes of the homes they build.
[KB Homes CEO Eli Broad] does not miss much. The 75-year-old real estate pioneer has seen bull and bear markets, and in recent years he watched as the company he founded (and cashed out of so he could focus on philanthropy) lost its way. During the bubble, KB Home, like many other big builders, blew up its old-line business by going ritzy and building expensive houses. Now KB is among the first homebuilders to recognize the error of its ways, and it is returning to its roots as a purveyor of low-cost, smaller homes. In some cases KB is even using the same façades from the go-go years and then shrinking the house that lurks behind them to be half as deep—and about half as expensive. "If I had to write a headline for housing, it would be back to basics," says Broad. "The right thing to do is just what KB is doing: build starter homes that compete with rentals."
Today seven in ten KB customers are getting financing from the FHA. The current rates are below 6%, more than 100 basis points under those on jumbo mortgages not backed by the FHA or Fannie Mae or Freddie Mac. (Fannie and Freddie lend less readily to people with past credit problems and hence aren't as crucial to the entry-level market as FHA financing.) Congress has raised the FHA limit to $729,750 in high-cost areas like Los Angeles through the end of 2008. But even if the limits aren't extended, virtually all the houses KB sells are priced for an FHA loan.