Transcript: Bursting a Bubble

This is a partial transcript from "Your World with Neil Cavuto," February 16, 2006, that was edited for clarity.

NEIL CAVUTO, HOST: Who says there is a housing bubble? More boffo numbers today — housing starts at a three-decade high.

So, what is the headline in most places? That housing is at a top. Why is everyone assuming that home prices are going to go to hell in a handbasket?

We thought we would be a little contrarian here and ask Ara Hovnanian, the man who heads up the home-building giant Hovnanian (HOV), and Pam O'Connor, the CEO of Leading Real Estate Companies of the World, formerly known as RELO.

Ara, to you first.

Of course, you are a home-builder. You are not going to say things are stinky.

(LAUGHTER)

CAVUTO: But they are not as rosy, we are told.

ARA HOVNANIAN, CEO, HOVNANIAN ENTERPRISES: Oh.

CAVUTO: Is that true?

HOVNANIAN: Absolutely.

I mean, clearly, the frothiness that experienced over the last two years is gone. But that's a good thing. We are returning to more normalcy.

CAVUTO: All right. Now, your counterparts at Toll (TOL) were saying, it's not just a return to normalcy; it's that contracts are way off. Are they?

HOVNANIAN: Well, we haven't reported our new quarterly numbers yet. But Toll — who is a very fine builder — is in a very specific niche, typically on the luxury end.

CAVUTO: The high end, right.

HOVNANIAN: And I think this little correction affects different segments of the market differently. I can't say we are feeling the same kind of experience that they are right at this moment.

CAVUTO: All right.

Pam, what's going on out there, really?

PAM O'CONNOR, PRESIDENT & CEO, LEADING REAL ESTATE COMPANIES OF THE WORLD: Well, it's such a local market. I think that's the difficult thing, to really generalize nationally.

But I'm not hearing the negative things that I hear sometimes in the news. You know, really, the fundamentals are still very strong. We have got decent interest rates. We have got moderate job growth. We have got good demographics, in terms of, you know, the boomers still buying, the echo boomers coming behind them.

So, we are actually pretty optimistic. We think this will be the second best year on record.

CAVUTO: All right, Ben Bernanke, the new Fed chairman, Ara, as you know, was speaking on Capitol Hill yesterday, today, more or less saying, you know, not buying the bubble talk, but, like Greenspan, buying the notion that, in certain markets, things could get worse. Do you buy that?

HOVNANIAN: Yes. I think that's certainly true.

I mean, the run-up in prices that we have had over the last 24 months, in certain markets, was just unsustainable. And it had to at least flatten off for a little bit.

CAVUTO: Well, what are you seeing? When you build a community, I know it's sold out before you even put the first brick in. Are you still experiencing that?

HOVNANIAN: Oh. You know, as Pam just said, the markets are localized. And it depends on the individual circumstance.

CAVUTO: What's the market that you have seen the biggest impact so far?

HOVNANIAN: I would say, probably, right at the moment, we have seen a little more slowing in West Palm, in that general area in Florida.

CAVUTO: The Florida area, right, which was the hottest area last year.

HOVNANIAN: Which was a very, very hot area.

CAVUTO: So, a little less pricing flexibility than you had?

HOVNANIAN: Definitely.

CAVUTO: Yes.

HOVNANIAN: Definitely. But that's good.

Also, what has happened is, the investors that were jumping in, in droves...

CAVUTO: The flippers.

HOVNANIAN: Yes. They have not only pulled out, which is good, but they have put the homes that they have purchased on the market, so it is a little less demand, a little more supply.

(CROSSTALK)

CAVUTO: You know, Pam, there is a feeling that when the flippers get out, those who buy properties and sell them, oftentimes, before the property is even finished built, that, when they go, it's sort of like the day traders. When they were burnt in the market craze, the rest of us got burnt afterwards. Could that be a sign that's negative?

O'CONNOR: Well, when you look at that South Florida market, though, I mean, one of the things that we are seeing, they are lagging right now.

But you have to take into account that they had 17 days last fall where they were closed because of the hurricane. So, I know I talked this morning to one of our Miami brokers. And their pending sales are up 5 percent over this time last year.

So, you're right. The flippers are sort of out of the market. But the number I saw for Florida was something like 32,000 new housing units have to be created for all of the inbound traffic there. So, I really don't think it's as dismal as you hear.

CAVUTO: All right.

Ara, what is your thought, though, that it is all jobs; if the job situation starts dipping back, then you're in trouble?

HOVNANIAN: I really don't think that's going to be the case. I mean, interest rates are very reasonable.

CAVUTO: What would not be reasonable? If it's 6, 7 percent? If it gets up to 10 percent, I guess, that's not good?

HOVNANIAN: Sure. Absolutely. I would say...

CAVUTO: What could you live with?

HOVNANIAN: The 8 percent would be a psychological barrier, in my mind that I think other buyers would relate to as well.

CAVUTO: Right. We are a point-and-a-half from that.

HOVNANIAN: Yes. Oh, absolutely. I think interest rates are fine. There is no issue with rates. And I doubt the Fed is going to change its policy to alter that very dramatically.

CAVUTO: All right.

Ara and Pam, I want to thank you very much. And thanks for being patient during the president's remarks. But we thought it was important for you to hear that.

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