Interviews

Transcript: Housing Bubble?

This is a partial transcript from "Your World with Neil Cavuto," May 25, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: My next guest has been in the real estate biz for some 40-plus years, says enough is enough, bubble schmuble, stop freaking out about a housing bubble.

Joining me now, the country's biggest landlord and real estate magnate, Sam Zell.

Sam, good to see you.

SAMUEL ZELL, CHAIRMAN, EQUITY OFFICE PROPERTIES TRUST (EOP): Pleasure to be here.

CAVUTO: You don't buy it. Why not?

ZELL: No. I just don't think that there's any historical basis for it. They're trying to compare the sale of securities, which can be sold instantly, with the sale of houses and apartments, which can't be.

We don't have any excessive creation of new product. Sure, there are probably parts, places in the country, South Florida, for example, where things seem to be extremely frothy.

CAVUTO: When you say frothy, what would happen, then, if there were a correction?

ZELL: Well, I think there's a question as to what would happen. In other words, a correction...

CAVUTO: Some say crash.

ZELL: Crash. I just don't see how you have a crash. I mean, you have a crash when you have a whole bunch of people selling stock on the same day. I have never seen a housing — quote — "crash," as you put it.

And I have been in this business for 40 years. And the reality is that, number one, I think that the savants on TV and radio are major contributors to the concept of a bubble...

CAVUTO: You're not referring to FOX.

ZELL: No, God forbid.

CAVUTO: No, no, God forbid.

ZELL: But the more you guys talk about it, the more likely it is that you are going to create the bubble.

CAVUTO: Self-fulfilling it.

ZELL: By virtue of what you're talking about it.

CAVUTO: There's something to that, Sam.

But, you know, I know you dismiss the froth talk. But here's what reminds folks of froth, people flipping properties without ever seeing the property, people taking out home equity loans or second mortgages to buy properties that they in turn sell very quickly. That's frothy.

ZELL: Well, I think that that's true. And that is frothy.

And I don't think there's any question that, in parts of the country, there are potential frothy environments. But frothy environments and taking that and then converting that to some kind of a crash just doesn't make any sense.

CAVUTO: But someone's going to listen to this, Sam. They know you're very successful at this business. Of course you are not going to talk about that, because it would ruin your business.

ZELL: On the contrary. I'm not in the single-family housing business. So it has no effect on...

(CROSSTALK)

CAVUTO: But you're in a market that's been very strong on the commercial side. You take apartment buildings, rental buildings, swap them over to condos. That's a big part of what you do.

ZELL: Sure. But that's not a big part of what we do, but it's something that we do, do. But...

(CROSSTALK)

CAVUTO: And you don't see any signs there that look at least a little weird?

ZELL: I think the biggest problem is that everybody is having an awful lot of trouble believing that the American consumer is smart enough to buy real estate at a time when the CPI is unrealistically reporting the level of inflation. And I think the American public is a lot smarter than they're being given credit for.

CAVUTO: What do you mean by that?

ZELL: Well, you look at the pattern. OK? The pattern is that we have had very significant — I mean, reproduction costs of housing in the last 18 months probably gone up 30 percent, despite the fact that the CPI has gone up 2.2 percent.

So, I think that the American public...

CAVUTO: So, one figure is lying about the other.

ZELL: Yes, well, I know how much...

(LAUGHTER)

ZELL: I know how much cement has gone up.

CAVUTO: Right.

ZELL: I know how much steel has gone up. I know how much copper has gone up. Now, translate all those things into 2.2 percent. It's kind of squeezing it into a very difficult package.

CAVUTO: So, if you are right, then Alan Greenspan has got to hike rates a lot more to deal with that.

ZELL: Well, I think, by the way, if you really wanted a simple solution, all Fannie Mae has to do is, Fannie Mae and Freddie Mac say, we're not going to buy any more investor loans. Overnight, the entire...

CAVUTO: That would put a chill on it.

ZELL: The entire bubble is gone.

CAVUTO: Yes.

ZELL: Just gone overnight.

CAVUTO: But you don't see that, right, period?

ZELL: I don't know.

(CROSSTALK)

ZELL: I mean, if I were Fannie Mae and Freddie Mac, I might in fact be thinking along those lines and would be, you know, as a safety measure, to in effect to...

(CROSSTALK)

ZELL: Cool down that frothiness.

CAVUTO: To cut out the gambling craziness, right?

ZELL: Yes.

CAVUTO: OK.

Sam, good seeing you. Thank you very much.

ZELL: My pleasure.

CAVUTO: Sam Zell, the mogul — that's what we call him. He doesn't call himself that, but he is.

All right, for more on those record home numbers just out today, we turn to one of the head honchos in the building industry. Donald Tomnitz is the man who runs D.R. Horton.

Don, good to have you.

DONALD TOMNITZ, CEO, D.R. HORTON (DHI): Thank you, Neil.

CAVUTO: You probably heard Sam, very respected name in real estate. He says that this might be just a bit of overstatement, this froth talk. Do you buy that?

TOMNITZ: Actually, I think it is.

And pricing power moves one from part of the country to the next. In other words, for the last two or three years, we have had great pricing power in Phoenix and in Las Vegas and California. And the last two or three years, Florida has had good pricing power. But what drives our business, really, is job growth. And if you look at a great example, in Colorado last year, they created 4,000 jobs in an entire state.

Home builders don't have any pricing power there. But you go to a place like Washington, D.C., which created 85,000 new jobs last year, and there's pricing power there. Real estate prices are escalating for one good reason. The supply/demand is out of balance.

CAVUTO: All right. But here's the argument that maybe your business is out of balance. I'll just play devil's advocate here, but that, in the latest period for your company, Northeast building up, what, 37 percent, in the West, up close to 3 percent, that these hot pockets continue unabated, and that that itself is a danger sign. Do you agree with that?

TOMNITZ: I don't think the hot pockets stay unabated, because I really think what happens, clearly, is, when the supply starts to meet the demand, then, all of a sudden, there's not as much pricing power.

And if the job growth is not prevalent in an area, then it's not going to have any frothiness to it. And you talk about South Florida, where there are some high-rise condominiums.

And that's not a business that the typical large builder is in. D.R. Horton and the top 10 home builders on the U.S., our primary business is delivering single-family homes.

CAVUTO: Yes. But, even in Florida, weren't you up 58 percent there?

TOMNITZ: In terms of volume? Yes, absolutely, because three to five years ago...

CAVUTO: So, I guess what I'm saying is, if you are up 58 percent in Florida, if you're up 79 percent in Arizona, if you're up 40 percent in California, that pace is hard to maintain, right?

TOMNITZ: No question about it, but ask yourself, three to four years ago, we were up those percentages. We were up those kind of percentages in Denver. We were up those kind of percentages in Tucson. We were up those kind of percentages in Atlanta, that kind of percentage in Dallas-Ft. Worth.

So, as I say, what drives those percentages is simply where jobs are being created.

CAVUTO: All right, very well put.

Don, thank you very much. Don Tomnitz of D.R. Horton. Thank you, sir.

TOMNITZ: Thank you.

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