Transcript: Bubble Trouble

This is a partial transcript from "Your World with Neil Cavuto," March 22, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: Well, speaking about getting hurt, the Fed raised the roof on interest rates yet again today, but is the housing market about to go through the roof despite it? Let's ask Bruce Karatz. Bruce is the chairman and the CEO of KB Homes (KBH) in Los Angeles. First quarter earnings up there up 65 percent.

All right. Good to you have, sir.


CAVUTO: What's going on here? I thought people were stopping the whole housing momentum.

KARATZ: Well, you didn't hear that from me, but it's really just continuing more of the same. Generally an imbalance of supply and demand. And we're just seeing it continue again another quarter.

CAVUTO: You know, I was reading your backlog is up 40 percent over a year ago. It's 23,000-plus units or something like that. Is it just because people fear interest rates are going to get higher, that they're getting off the fence, or what?

KARATZ: No. I think that what we have to remember is, one, there is strong population growth in the United States being driven primarily by immigration.

Secondly, people have truly in all segments realized that owning is smarter than renting. So, you have got, whether it's students in Los Angeles going to USC or UCLA, or active retirees moving down, everybody wants to own. And that's putting a little pressure on the supply, and it's creating a very strong housing market.

CAVUTO: But in your neck of the woods, Bruce, we've seen appreciation, depending on the exact area, 25 percent to 30 percent year over year. Surely, we can't continue seeing that?

KARATZ: Totally agree. If that were to continue, we'd end up in a total affordability crisis.

CAVUTO: But don't we have that now? The numbers show that the affordability index is the worst it's ever been for prospective home buyers.

KARATZ: Affordability index is tougher, but there's also so many buyers who do qualify that, frankly, there's enough buyers for the inventory out there, so it's not really an issue for the market.

CAVUTO: Let me get your sense of Alan Greenspan. Talk is that he's going to keep hiking rates a quarter point at a time. We could get 4, 5, 5.5 percent short term interest rates. Then what?

KARATZ: Well, you're smarter than I. As Greenspan keeps hiking short term, long-term rates keep dropping.

CAVUTO: Good point. Good point.

KARATZ: So I don't know where that ends up, but I think that rates are still so attractive that there's not much that's going to happen for the foreseeable future, that would slow down housing demand.

CAVUTO: What's your biggest worry right now, Bruce?

KARATZ: Well, you know, I worry about lots of things. I think that our biggest concern is probably finding enough good land parcels in order to continue growing the business long beyond 2007.

CAVUTO: All right. Bruce Karatz, thank you very much. Always good having you on.

KARATZ: All right.

CAVUTO: Bruce runs KB Homes, the terminate CEO in Los Angeles.

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