We didn’t need KB Home’s dismal quarterly earnings release today to tell us that foreclosures are digging home builders into an even deeper hole.

We knew that already; this just put a period on it.

KB [ KBH 11.69  +0.00 (+0.00%) ] caters to first time home buyers, with smaller, less expensive homes. Unfortunately, bargain basement foreclosures, many of which are relatively new construction, offer more home for the money, and first time buyers are making up less of the buying population today than historical norms.

Right now banks are pushing foreclosures to market faster than ever, perhaps due to improving paperwork procedures, and perhaps due to the fear of some kind of settlement/penalty coming down the pike from state attorneys general and federal regulators. In any case, the volumes are rising, and that hurts home prices and home builders.

“We continue to think prices will be under pressure throughout 2011; we may have to re-evaluate all of our assumptions given the weakness we’re seeing right now,” notes analyst Buck Horne at Raymond James.

So what’s a builder to do?

Well, Lennar [ LEN 18.32  +0.00 (+0.00%) ] has been investing in troubled mortgages through its Rialto Capital Advisors division, and that has helped boost its bottom line.

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