This is a partial transcript from Your World with Neil Cavuto, July 23, 2002, that was edited for clarity. Click here for complete access to all of Neil Cavuto's CEO interviews.
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NEIL CAVUTO, HOST: With stocks tanking, everybody wants to know what's going to be the next bubble to burst? Could it be the housing market? Who better to ask than the heads of the top homebuilders in the nation. From Dallas, Larry Hirsch, the CEO of Centex Corporation; Donald Tomnitz, the CEO of DR Horton; and from Miami, Stuart Miller, the CEO of Lennar. Gentleman, welcome to all of you.
Stuart, to you first. Housing seems to be very resilient, your industry, particularly so. What is going on here?
STUART MILLER, CEO, LENNAR (LEN): Well, I think the fundamentals still remain strong for housing. Even though we see consumer confidence waning a little bit, you've got to remember that you've got a double-edged sword going. Interest rates remain very low, and that is decreasing the monthly payment to the average customer. Employment is still pretty strong, and owning a home is a pretty good alternative to the stock market these days.
CAVUTO: Larry, the one issue that people raise about housing is that it can't continue like this. Increases, averaging double, if even triple, in some communities, average cost of living increases and salary increases, you just can't keep pushing that.
LARRY HIRSCH, CEO, CENTEX CORPORATION (CTX): Well, you know, if you look at the last 30 years, housing has gone up about four percent a year, and has beaten the CPI by about 100 basis points. And I don't expect that to change very much. You know, when we look at the bubble, we have never had any real issue with housing when we had low interest rates and we had limited supply. And with the builders more disciplined today, there's not a lot of inventory in the field, and we have interest rates going back, mortgage rates down to a low six-percent level. That is an excellent formula for housing.
CAVUTO: Donald, the fear seems to be, as you know, that people get skittish about their own financial position, take a look at the stock market, take a look at those paltry pay raises they have been getting, and they say I do not care how low interest rates are, I can't do it.
DONALD TOMNITZ, CEO, DR HORTON (DHI): Well, I think the real American dream, Neil, is to own a home, and I agree with my other two counterparts there that the interest rate scenario was never been better. Housing affordability is one of the highest it's been in the last 30 years. Mortgage rates are as low as they've been in over 30 years.
And the real American dream is to own a home. It is a safe haven for the money today relative to the stock market. And I still believe people will seek the American dream. And I agree with Larry, there really is no bubble, that price appreciation in homes is not really out of whack with where it's been on a historical basis.
CAVUTO: Then let me flip it around, guys. That's a great point. Stuart, maybe you want to respond to this. The worse stocks look, the better housing looks. So, do you need this market to continue to be lousy for the home market to continue to look great?
MILLER: No, I do not think so, Neil. I think that owning a home, as Don said, as Larry said, is the American dream and it is a safe haven. It's the first place and the best place to put your money. It's a place where your money is not only likely to grow, even while the stock market is growing, but additionally, it is a place where you are going to raise your family. So, you've got a great place to live and you got a great place to put your money at the same time. And if you look back over the `90s, home building boomed even while the stock market boomed.
CAVUTO: Well, there is no doubt about that, Larry. Here is the worry about bubbles revisited like that in the late 1980s, that spread into the early 1990s, when there was simply overbuilding. Now, I know a lot of towns and states and municipalities make it tougher for you guys to do that with zoning restrictions and the like. But a lot of you guys have been building like crazy. Do you worry that you're going to be stuck?
HIRSCH: You know, really, if you look at it, Neil, over the last five years, the single family housing start market has bee relatively stable. The phenomenon has not been growth and housing demand and wild movement in the terms of the number of houses being built. It has been consolidation of the industry, so that Centex and Horton and Lennar and others have gained a greater market share. And that's what has driven our higher units, not a gross increase in the absolute number of houses.
So, we're still in very good shape to take market share. We have more capital than the smaller builders. And as land gets more complex, as it gets more difficult to take it through the regulatory process, the bigger builders are going to succeed and, you know, with the stock still at seven, eight times earnings, still great investments.
CAVUTO: Got to tell you something, this is open to any of you gentlemen, you know, the kind of money that people have made in hot markets in the northeast and parts of the west, I guess in the Boston area as well, gains have been absolutely mesmerizing. High teens is not unusual for certain high markets. If they cool down, Murphy's Law says everyone cools down. Is that true?
TOMNITZ: I do not think that is the case. I think each market is a market to its own. I think you saw the same thing happen in San Francisco a couple of years ago with the dot-com and the technology companies. But as we've worked through that excess in the San Francisco area, all of a sudden there is pricing power in the San Francisco Bay Area.
CAVUTO: And that was actually in the very high end, was it not, Donald?
TOMNITZ: Yes, it was.
TOMNITZ: So as a result, I just think every market is different. And one of the beautiful things about our three companies is we are very geographically diverse, and we're not reliant upon Boston or Atlanta or any one specific market.
CAVUTO: But you all know that the high end of the market is the one that seems generally the most resilient. You've all got exposure there. Do you want to build that exposure just in case the lower end falls off a cliff?
HIRSCH: Well, I look at it a little bit differently. Sixty percent of our market is the first time buyer and the first time move-up. And it's a much more solid market demographically because of what we are seeing in the echo-boomers coming through. The sons and daughters of...
CAVUTO: Wait a minute. I'm sorry, Larry, but I thought that was the same market where lending restrictions are tightening up and banks weren't being quite so aggressive in lending.
HIRSCH: I think that Fannie Mae and Freddie Mac, if you look at them, the underwriting standards have been relatively consistent, but they are changing. There is still plenty of money available for the first-time buyer. And it is a more stable market over time, and not, by the way, dependent like your previous guest, on 401(K)s to succeed. It is not a discretionary market. It is a need-based market, and that is a good market to be in.
CAVUTO: Do you worry, guys, though about the people who keep tapping and retapping and re-retapping their homes for equity, that they keep pushing this puppy and eventually, this puppy gets sick.
TOMNITZ: I do not think that impacts our business. We are really dealing with that first-time homebuyer largely, at least at Horton, and the other two companies here. Sometimes...
CAVUTO: Yes, but a lot of people use that money to go ahead and buy a second home or a vacation home. Do you worry about that?
TOMNITZ: No, we don't. I think that the basic demographics are, as I said earlier, the emigration and the echo boomers are the ones who are really driving this first-time home buying market. And I do not see anything slacking in that demand.
CAVUTO: All right. I want to thank...
MILLER: And I think that this...
CAVUTO: Go ahead.
MILLER: I was going to say I just think additionally, you have a growing demographic trend. If you look out over the next 10 years, you still see population growth and you still see immigration fueling the demand side of equation.
CAVUTO: OK. Don, Stuart, Larry, thank you all very much. I appreciate it guys.
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