KB Home is leaning hard into its build-to-order (BTO) strategy to navigate a difficult market defined by compressed margins, affordability strains and shaky consumer confidence. However, this blueprint presents risks in an environment where a spec-heavy approach drives volume and market share amid declining backlogs.
The builder’s Q4 earnings call offered mixed results, with shrinking margins coming in below guidance. Revenue beat Wall Street expectations, but was still down 15.3% year-over-year, and the builder’s backlog continues to shrink.
KB Home hopes that its BTO pivot will right the ship. Whether the strategic bet on BTO will pay off in this volatile market is unclear, but the Los Angeles-based homebuilder thinks that this strategy is its main competitive advantage in a cutthroat environment.
BTO homes offer higher margins, and KB Home is now able to deliver units more quickly than before. The customized production model is at the core of the builder’s strategy of personalization and price transparency, with a choice of lot, floor plan, design studio upgrades and exterior elevation. It underpins the company’s customer-facing brand and operational approach.
Lately, though, the BTO model has hit a snag, as a declining backlog has forced builders across the nation to up their count of spec homes, resulting in lower margins.
KB hopes to return to its historical mix of 70% built-to-order homes and 30% specs, up from its current ratio of 57% BTO homes. The upward pressure on margins could make this strategy worth it, but the approach isn’t without its risks. In an environment of declining backorders, KB signaled that it is willing to give on market share and pace in favor of higher margins.
Stronger and more efficient BTO execution
KB Home’s BTO mix is up from the 50% mark in Q3, and is expected to stay at roughly 57% in Q1 2026. The goal is to get back to the 70% mark by the end of 2026, as the builder works through older specs sitting on the market.
According to executives, built-to-order homes typically result in gross margins 300 to 500 basis points higher than spec homes, and KB is now able to build a BTO home in an average of just under 120 days, down 20% year-over-year. Some divisions are now building BTO homes in less than 100 days on average.
This improved efficiency is a big win for KB Home, as the improved cycle time aligns much better with the timeline for resales and spec homes and allows buyers to move in much quicker.
“When we got into starting specs, it was largely driven by the supply chain crunch that we had in our cycle times. It expanded big time, and it just made it difficult for a lot of reasons to sell BTO when it was taking 220 days, 240 days to deliver that home,” Rob McGibney, president and COO, said during the earnings call.
The reversion back to a BTO-heavy mix isn’t necessarily a different strategy, but is instead a result of more efficiency, executives said. With an amplified cycle time, the value proposition of built-to-order is greater than it previously was.
“Would you rather have a completed spec with a lot of incentives to move it, or do you want to build your own home and create your own value and close 30 days later or 45 days later? So what we’re seeing is, with our build times coming down, the value proposition of the personalized home at an attractive price is more compelling. So we don’t think that our customers are competing with the specs,” said CEO Jeffrey Mezger.
According to McGibney, KB Home doesn’t see much competition with its BTO focus among the first-time buyer segment. This is partially because of KB’s more efficient cycle times, but also because the market overall has shifted more heavily to spec homes in recent quarters.
“Most of what we see is that builders are trying to cover their spec inventory that they’ve got, and it’s kind of the same game. You’ve got inventory, you’ve designed it, and it’s out there, and it may not be exactly what people want. So they’re discounting that product and giving rate buy-downs and everything else. We see very little competition with our built-to-order focus, especially on the first-time buyer space,” he said.
The embedded risks in the BTO-heavy strategy
On paper, the BTO-heavy strategy seems like an easy win, with increased cycle times and significantly higher margins than spec homes. The builder’s quarterly gross profit margin was 17% and is expected to bottom out between 15.4% and 16% during Q1 of 2026 as KB works through older spec inventory with a higher cost basis. Increased margins can’t come soon enough.
However, the anticipated shift to BTO is also happening at a time when backlog orders are down 37% year-over-year. The decline in backlog orders is a main factor that drove a shift to spec homes to begin with. The risk is that pivoting away from spec homes could lead to fewer sales and declining market share, even if margins do increase.
KB’s strategy is to keep a seasonally adjusted sales pace of four homes per month for every community, and executives believe that they can sustain this sales pace even with a higher BTO mix.
Wolfe Research analyst Trevor Allinson, after KB Home’s Q3 earnings call in September, wrote that the pivot to 70% BTO homes could take longer than executives are promising.
“We believe the company will take market conditions into consideration when determining how quickly to pivot back toward its historical BTO mix,” Allinson wrote. “Even in a stronger market, the transition likely leads to more modest growth versus spec-heavy peers.”
For KB Homes, the trade-off is straightforward. The builder is electing to protect prices and push margins higher instead of pushing for more home closings and market share. That’s potentially a risky bet that depends on buyers returning to customized homes in 2026.
The company appears to be betting that resilient, higher-income buyers will push off concerns about the broader economy. Meanwhile, the calculation is that more price- and rate-sensitive buyers will reach a stable enough financial position to move ahead with buying a new home.
Implications and key takeaways
KB’s move in favor of margin-heavy, built-to-order homes could heighten competitive pressure for private builders operating in the same markets. Private builders, already facing limited land availability, compressed margins, and rising capital costs, may see their margins squeezed further as they try to match the pricing of a reconfigured KB Home.
For KB, this bold, strategic pivot does have its risks. It’s a clear contrast to a market dominated by specs, and an alternative to the pace-over-price strategy employed by the likes of Lennar, K. Hovnanian Homes and Smith Douglas Homes. However, what KB loses in market share, it could gain in improved margins.
KB’s success in managing this shift could act as a test case for whether a built-to-order, margin-conscious approach can still succeed amid a volatile, margin-compressed homebuilding environment.