The impact of the escalating war with Iran is no longer limited to what Americans pay for gas or geopolitics. There are increasing signs that this is having a direct impact on the U.S. housing market.
KB Home became one of the first major homebuilders to explicitly link the dispute to a decline in demand, cutting its full-year outlook after lower-than-expected sales in early March.
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On March 24, the company announced first-quarter sales of $1.08 billion, down 23% from a year earlier, and lowered its delivery forecast, citing slowing buyer activity and increased uncertainty due to the war.
KB Home management believes “weakening consumer confidence, rising mortgage rates and affordability pressures” will dampen consumer demand in the short term.
Executives directly pointed out geopolitical instability multiple times during the earnings conference, citing new headwinds compounded on an already fragile housing market.
“As we enter early March, there’s a lot of turmoil going on in the world,” CEO Rob McGivney said during an earnings call. “And we said in our prepared remarks that this conflict in the Middle East began at the very end of February.”
McGivney continued that the past few weeks leading up to the earnings report were “a little bit softer than what we would expect and what we would normally get at this time of year.”
“And I don’t think anyone knows how long this dispute will last and what impact it will have on consumer sentiment and confidence, so there’s not much visibility at this point,” he said. “But we feel that it’s weighing on consumers at the moment.”
Profitability declines due to rising costs and declining sales
KB Home’s first quarter results reflected multidimensional pressures across the business, with deliveries down 14% to 2,370 homes.
The average sales price fell from $500,700 to $452,100, leading to a sharp contraction in profitability. Homebuilder operating income decreased to $33 million from $127.3 million in the same period last year due to narrower profit margins and higher expenses as a percentage of revenue.
The company’s housing gross margin decreased from 20.2% to 15.3% due to price reductions, higher land prices, changes in geographic mix, and lower operating leverage.
Meanwhile, selling, general and administrative expenses increased from 11% to 12.2% of housing revenue, reflecting lower sales volumes, although there was some benefit from insurance recoveries.
Net income decreased from $109.6 million to $33.4 million, diluted earnings per share decreased from $1.49 to $0.52, and financial services income also decreased due to lower loan originations due to fewer home closings.
“Additional layer of uncertainty”
Executive Chairman Jeffrey Mezger emphasized that the company has returned to a primarily made-to-order sales structure and said this is a strategic shift that is fundamental to the company’s long-term positioning. Mezger said the company expects these homes to account for about 70% of deliveries in the second half of 2026.
The move is expected to expand KB Home’s backlog, which executives see as a key advantage in a volatile market. A large pipeline of homes sold but not yet built provides better visibility into future deliveries and typically yields 300 to 500 basis points higher profit margins than speculative inventory sales.
Financially, KB Home reported earnings of $0.52 per share while maintaining what Megger described as a “balanced” capital allocation strategy. The company returned nearly $70 million to shareholders through dividends and share buybacks, and repurchased 843,000 shares at a price below book value, pushing book value per share to more than $61.
“Against this backdrop, and considering that net orders in the first quarter were below the level needed to maintain year-over-year growth (full-year delivery guidance), we are lowering our order scope for the year,” Mezger said.
Like all homebuilders, the macro environment has become more challenging for KB Homes.
“Consumers have faced a variety of challenges over the past two years, and the Middle East conflict has added to the uncertainty,” Mezger said.
Will material costs become the next pressure point?
KB Home is also seeing early signs of a resurgence in cost volatility, even as it continues to drive structural efficiency improvements across its business. McGivney said the company is making “good progress” on controllable costs through value engineering, contract renegotiation and rebidding efforts, which he characterized as lasting improvements to the business.
However, he warned that new pressures on materials, particularly wood, have begun to build in recent weeks.
“There are different locks in the timber strategy, and different sectors have different lock periods,” McGivney said, noting that future costs could move in either direction depending on how prices move when contracts reset.
Even amid new cost pressures, KB Home executives said they remain confident in their ability to weather volatility. McGivney said the company’s current cost strategy is “sound,” noting that short-term cost increases are unlikely to have a material impact on overall results and could be offset by continued efficiency improvements in other parts of the business.
Even more unknown, he suggested, are the potential downstream effects of the Middle East conflict.
“As far as the impact of the situation in the Middle East, that’s very difficult to judge,” McGivney said. “Certainly, with oil prices rising, land development and vertical construction may be affected. And many products that enter the home contain oil at some point.”
McGivney emphasized that these risks remain largely theoretical at this point. The company is preparing to counter the increase through aggressive cost management, but so far there has been no measurable impact, he said.
“We haven’t seen it yet,” he said. “It’s not reflected in the cost yet.”
The impact of the war on mortgage interest rates
The Iran conflict is also pushing up mortgage rates at a critical time for homebuyers.
As Inman reported on March 27, interest rates have soared in recent weeks on the back of market reaction to the escalation of military operations in Iran. This change coincided with a sharp rise in energy prices. The timing is especially important as the spring home buying season begins.
Just a month ago, mortgage rates fell to their lowest levels in more than three years. The momentum quickly reversed. Interest rates rose from 5.99% in late February to 6.62% by March 27, according to Mortgage News Daily.
The impact on affordability was immediate. A buyer aiming for a mid-priced home with a 20% down payment would see their purchasing power reduced by more than $21,000, even with no changes to their monthly budget.
Mr. Inman created an interactive tool that shows how much purchasing power has been eroded by the ongoing rise in interest rates.
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