Home Building Roundtable

This is a partial transcript from Your World with Neil Cavuto, November 28, 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: Own a home? Well, then I don't have to tell you that it's been one of your best investments this year. But is all that about to change? I want you to take a look at these numbers. Home building stocks have been stumbling of late. Is that a reason to worry?

Let's ask the guys who run some of the biggest home builders around -- perspective from coast to coast. From Los Angeles, Bruce Karatz, the CEO of KB Homes. From Miami, Stuart Miller, the head of Lennar Corporation. And here in our grand New York studios, Ara Hovnanian, the chieftain of Hovnanian Enterprises.

Ara, we can only begin with you, the hiccuping concern, it's out there, is it real?

ARA HOVNANIAN, HOVNANIAN ENTERPRISES CEO (HOV): Well, you know, we have been hearing this for four years now, everybody keeps thinking the sky is falling. And meantime, demographics tell the story, households are increasing, the environment is very good for our business.

CAVUTO: Still, Stuart Miller, there is a concern out there that some markets have gotten a little too hot and that maybe it is comeuppance time. What do you say?

STUART MILLER, LENNAR CEO (LEN): Well, we read about it every week almost in the newspapers and in the magazines, seems like bubble talk is everywhere about specific markets. But the fact is land is scarce, and with the scarcity of land, and population and demographics on the increase, it seems that the pricing of homes remains reasonable, relative to the high demand.

CAVUTO: All right, now, perspective is everything, and Bruce, maybe help me this. It was an intriguing kind of a perspective on this. Since this boom really took off in 1995, housing prices have jumped more than 50 percent, in hot markets like Boston, better than 90 percent, in key areas, 100, 110 percent, can that keep going?

BRUCE KARATZ, KB HOME CHMN. & CEO (KBH): Well, you have taken really one end of the spectrum. And there are a couple of markets, throughout the United States, where you have seen that kind of appreciation. But to counter that, let me just tell you that at KB Home over the last five years our average prices have increased 4.4 percent per year. So on balance, I think if you look at the big home builders, the reason people continue to buy is with low interest rates, it is still a better purchase than either an investment in the stock market, or continuing to rent an apartment.

CAVUTO: Well, you know, timing is everything, too, the last what, eight, nine weeks, have been good for the stock market. Your stocks have done pretty well obviously. But, it's like a snapshot depending on when you take a look at it, it can be good or bad. And the perspective since the stock market has been running up is that home builders have been lagging that run-up, that maybe this is telling us something.

HOVNANIAN: Well, I mean, the average multiple for industry is about 6 1/2 times P/E, it is barely trading above book, it basically already...

CAVUTO: That has always been is a case with home builders. I don't know why that is.

HOVNANIAN: Well, no actually, the average, if you go back, if you exclude the last three or four years, the average P/E multiple is 10 to 15 times. So it is really only this unusual period when they keep expecting the subsequent year is going to begin the slowdown that we have been in single-digit P/Es. It's very frustrating.

CAVUTO: Stuart, it is interesting, I think I have a full screen here showing how you three guys have been doing in market. You've been doing very, very well versus the S&P 500, which has been, not doing so well. Lately it has been percolating. Do you think that can continue, though, that eventually, an improving market, improving economy, then you see improving housing, that the flip side might happen now, if things are finally improving, that you have had such a great run-up as it is, that just you pause on the fact, and refresh on the fact?

MILLER: Well, I don't know. Seems that the home builders have continued to do well in a declining economy. It seems that we are poised to continue to do well with interest rates relatively low or very low right now and likely to remain relatively low. We will continue to do well, and generate increased earnings. And with increased earnings, all that is happening with our stock prices remaining stable, is our multiple keeps going down. It seems that our stock performance has to follow earnings at some point.

CAVUTO: OK. You know, I know I'm sounding like a wet blanket here, guys, so I apologize. I just have to raise these doubts that are out there. Bruce, when is this. Take a look at what's happening now, in the economy, and that, you know, a lot of people still lose their jobs, a lot of people now don't have the wherewithal to up the ante, so to speak, and borrow more because the refinancing wave can't go any further. And we have seen anecdotal signs that interest rates are beginning to tick up again, does that worry you?

KARATZ: You know, Neil, there are all sorts of things that worry us as businesspeople. But I think in the job picture, this week it was announced that the job picture is actually looking more favorable. The GNP was revised this week upward. And so I think generally speaking, the economy ought to be getting stronger, as Stuart alluded to. So I think it bodes well for housing demand.

CAVUTO: I think one thing we forget, too, here I'll say something good here, the strict zoning in so many states and municipalities and towns, it makes it difficult for guys like you to overbuild, doesn't it?

HOVNANIAN: Absolutely. Actually, if you look at the markets that have had highest price appreciation, the key areas in California, the New York suburbs where we are here, the Washington, D.C. markets, those markets are producing half of the housing annually compared to the activity that we saw in late `80s. And that is part of what's really pushing up the pricing in that. It is just this huge restriction that's making it very, very difficult. Of course for those builders that have good land supply there, it has been very, very profitable.

CAVUTO: Iraq, I guess, is a wild card, but, is it something that you follow, Stuart, is it something you worry about?

MILLER: Well, I think we have to remain concerned with world events. And you know, we all have to worry about how those world events might affect us domestically, might affect oil prices, might affect consumer price index, and inflation.

CAVUTO: But for now you don't sound too anxious about it.

MILLER: No, for right now we are running to the current state of the economy, and I think that things are looking good.

CAVUTO: Bruce, you agree with that?

KARATZ: I do. I just think that the world picture continually changes, and there is lots of things to be concerned about, but that we as leaders of our companies ought to focus on making our operations continually better. And in the end, there may be a lapse in demand but it will then pick up as soon as things return to normalcy.

CAVUTO: Bruce Karatz, final word on the subject, good seeing you again my friend, also Stuart Miller of Lennar, and last but not least Ara Hovnanian here in our studios. Thanks again, guys. Great Thanksgiving.

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