Housing Alternatives

This is a partial transcript from "Your World with Neil Cavuto," June 30, 2004, that was edited for clarity.

NEIL CAVUTO, HOST: Well, we knew this was coming, right? The banks would start raising their prime lending rates. And that is exactly what has started. The trickle has begun, Northern Trust indicating that its prime lending rate, which has been stuck at 4 percent with so many others over these many, many months has now gone up to 4.25 percent, other banks are expected to quickly follow suit after the Federal Reserve did hike interest rates today.

What’s the fallout now on the housing industry on all of this? With us now from Michigan is Richard Dugas. He is the president and CEO of Pulte Homes, one of the top homebuilders on the planet.

Very good to have you, Richard, thanks for coming.

RICHARD DUGAS, PRES. & CEO, PULTE HOMES (PHM): Thanks, Neil, glad to be here.

CAVUTO: You know, I noticed all the housing stocks were booming today, what happened.

DUGAS: They were. Well, we think the market has already priced in the rate increases. In fact mortgage rates have been rising for the past several months, up about 100 basis points from the low point. So we think the market perceived it as it was expected.

CAVUTO: All right. Where do borrowers hide, though? Normally when fixed term rates were moving up, and you’re right, Richard, they were moving up, but people could move to adjustable rates which stayed low because short-term interest rates stayed low. Now short-term interest rates are coming up. Where do they go? What do they do?

DUGAS: Well, our buyers are moving into adjustable rate mortgages. We saw from first quarter of 2003 where about 15 percent of our business was adjustable rate mortgages, shipped into about 30 percent of adjustable rate mortgages by the first quarter of ‘04. So we’re seeing that movement. Interestingly enough, a lot of people are locking in for say a 5-1 ARM, fixed their rate for five years or maybe seven years, so we’re not seeing too many people go for the straight adjustable mortgage 1 percent a year -- or, excuse me, adjustable per year type product yet.

But I think what would normally happen and what we have seen over rate increases, say, in 2000, would be for buyers to move into the adjustable rate mortgages at an ever greater rate and we think it can go significantly higher from where it is now and we’ll see that shift continue.

CAVUTO: All right, well, here’s the worry, that the shift, pardon my pun here, has hit the fan, that all of a sudden there is nothing that these people can do to hide the effect of higher interest rates, and you are right, they are much lower on the adjustable, shorter end of the market. But pretty soon those rates are going to go higher. If one of our guests was right they’re going to be quadruple more than that from where they are now in the next two years. What happens to a guy like you in that event?

DUGAS: Well, in our case, we’ve insulated ourselves as best we can from that type of environment. Our company builds for all different segments of the market, not just the lower end of the entry-level business. And as an example, the active adult business, which represents about a third of our overall business, 50 percent of those buyers pay cash. So when you are talking about a large builder like Pulte that operates in 27 states, in all different price points and all different customer segments, each of these segment are affected differently by rates. And.

CAVUTO: But I would imagine that lower end, though, not to jump on you there, but that is the end that hurts and so you have got to hope that your more well-heeled customers are the ones who help you with the balance, right?

DUGAS: Well, in fact, our business has been very, very strong. We weathered rate increases in the past. If you look at what a small builder that may be isolated for only entry-level product, particularly the lower end of the entry-level product, they are going to feel the pinch in this type of environment.

But as you have seen from many of the large builders, rather, that have mentioned order rates over the past several months, particularly in the last couple weeks, you have seen very strong numbers. And we haven’t commented yet on our second quarter but we were very, very robust in the first quarter in the rising rate environment and we expect that to continue.

We believe that our business will be very well protected, largely because of the adjustable rate shift into mortgages for adjustable rates, for buyers, as well as the fact that we are diversified. And I grant you that.

CAVUTO: Yes, I know you are very diversified and you are right to point it out, but I remember the last time the Fed aggressively hiked rates about a decade ago, then we went from short-term rates of 3 percent to double that. Homebuilders could not increase the price of their homes like they did in the past. Are you afraid of that happening again?

DUGAS: Actually, I’m not and I’ll tell you why. The structural environment in the industry today is significantly different than the last housing recession of ‘90-’91. The main reason for that is lot supply, land supply of approved lots in the country today is very diminished from what it was then. There was a huge…

CAVUTO: Supply. Yes.

DUGAS: That is exactly right, the S&Ls had pumped a huge amount of money into lots, those lots flooded the market. That doesn’t exist today and the land environment is very difficult, helping us.

CAVUTO: All right. Richard Dugas, always a pleasure, sir, appreciate it, thank you very much.

DUGAS: Thank you.

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