Q How would you describe the current economic condition in this country?
A There is no doubt that the U.S. economy has softened considerably over the past 12 months. The numbers tell the story. GDP growth is now hovering at about 2.5 percent, down a full percent from last year. Job creation has slowed to 1 percent annually. Mortgage rates have crept up continuously, and inflation is up about two and a half points over last year. In addition, shifting oil prices seem to have raised the anxiety levels among consumers and businesspeople alike. As a result, consumers are reluctant to make large purchases, such as homes and cars. American business is feeling the pinch right now, and a lot of us our tightening our belts and bracing for the bumpy ride.
Q What are your economic predictions for the coming 12 months?
A The key question is how low long until the economy turns around and moves forward? If you look at all the indicators and listen to what the economists are saying, we are going through a correction cycle that will carry over into mid-2007, but that will rebound to levels similar to what we were seeing a year ago. I happen to agree with this scenario. I do not believe that we will slide into a recession, but I do believe that the current downturn will be around well into next year. The ride will be a little bumpy, but I believe that the economy will emerge strong with inflation in check, strong job growth and renewed consumer confidence.
Q Any economic road signs or warning signs that the federal government should be particularly concerned about?
A As a homebuilder, I always have my eye on mortgage rates. Until a year or so ago, the U.S. economy was being propped up primarily by a booming housing market. Low interest rates fueled a huge demand for housing that we in the industry were working very hard to meet. Consumers were happy, we were happy, and the economy was showing the benefits.
Suddenly, oil prices shot up, creating anxiety about inflation and subsequent interest rate increases. While mortgage rates are still very attractive, I think the Fed has to be very cautious over the next few months in its approach to setting interest rates. Every uptick in interest rates pushes the American dream of homeownership beyond the reach of hardworking families.
Q How do you define the nature of your business? Do recent economic trends require you rethink that definition?
A I would say that KB Home is in the business of building new communities and homes and helping families of all sizes and economic means to achieve the dream of homeownership. We’ve been around for nearly 50 years, and I believe we are recognized as one of the country’s premiere home builders, with a reputation for providing architectural innovation, as well as excellent quality and customer service. We differentiate ourselves from the pack in the way we do business. We do not build inventories of spec houses to sell at any of our communities across the country.
Instead, we build homes to suit our buyers’ needs and tastes. This means that when you visit a new KB community, the houses you see under construction have already been purchased and are being built for a particular buyer. I believe that this is one of the main reasons our customer satisfaction ratings are so high. Our homebuyers are getting exactly what they want, backed by an industry-leading warranty, excellent financing and superb customer service.
Like many other companies, we have had to tighten our belts and cut costs to reflect the current market realities. That’s just smart business in an economic downturn. However, the recent economic trends, in my opinion, underscore the benefits of our business model and our ability to successfully navigate changes in the market.
First of all, unlike many builders, we don’t have a huge standing inventory that we’re trying to move because every home we build is individually tailored to its buyer. In addition, we offer a diversity of product, from multifamily attached housing all the way up to single-family luxury homes. Our national footprint allows us to focus our efforts in areas of the country, like Texas, where there continues to be a solid, growing housing market. So I believe we are well-positioned to get through the current and projected economic conditions of the next 12 months.
Q Taxes: What limits business development most right now? What encourages most right now? What sort of tax legislation would you like to see put before Congress?
A In the homebuilding industry, one of the most important factors in motivating home ownership, along with low mortgage rates, are federal tax deductions available to homeowners. In fact, among the 35 million American taxpayers who use these benefits, the average amount of mortgage interest deducted is close to $10,000 per taxpayer. For those who deduct real estate taxes, the average exceeds $3,000. Clearly, these tax deductions are a significant driver of the economic engine known as the homebuilding industry.
In recent years, both the White House and the Treasury Department have toyed with the idea of tax reforms that would limit or eliminate these types of deductions. In my opinion, that would be a disaster. Not only would it wreak havoc in an industry that is one of the pillars of our economy, it would also create one of the largest disincentives to buying a home that this country has ever seen, and it would squeeze out of the market millions of American families who rely on tax deductions to make new-home purchases affordable.
As the government looks at tax reform, I would strongly urge Congress and the administration to avoid the temptation to tamper with a tax benefit that has worked to support a major economic component of this country for decades.
Q Regulatory reform: How big is the regulatory burden on your business or business sector? What would like to see reformed first?
A The state and local regulatory burden on the American homebuilding industry is enormous and is one of the most significant factors in making new homes less affordable. Here in California, for example, it is not uncommon for builders, and ultimately consumers, to absorb more than $100,000 in “soft” costs to comply with various state and local governmental fees, regulations, zoning restrictions and miscellaneous other requirements.
That’s about one-fourth of the median price of a home in California. It’s not uncommon for municipalities to have more than a dozen ordinances and policies that must be complied with before a shovel ever hits the ground.
The intent behind these regulations is generally valid: to protect existing residents, the environment, the safety and health of homeowners and to address other community concerns and needs related to growth and new home construction.
These are things that every community must be concerned about. But over time, many of these regulations have not been consistently reviewed, updated, and if necessary, eliminated. One constant has been the escalation of fees associated with regulatory compliance. Cities more commonly view these fees as generators of surplus revenue, rather than as dollars to fund police, firefighters, infrastructure and new schools. If homebuilders are expected to continue to deliver affordable housing, this cannot continue unchecked forever.
The only solution at this point is legislative. We must see state legislatures starting to pass and enact laws that put an end to imprudent fee charging and that draw fee charges closer to what it actually costs government to provide services and other support.
Q What is the most important resolution you have made about your business as we go ahead into fall?
A My resolution is to successfully weather the downturn in the housing market by continuing to listen to our customers, give them the products they want and impose financial discipline on ourselves to ensure that we are spending only on those things that deliver maximum benefit to the marketplace.
Equally important, I’ve resolved to not let the gloom-and-doom predictions about the economy and housing, which I do not believe are accurate, to permeate our company. We need to be optimistic about who we are as a business, how well we compete in the marketplace, and about the quality of the homes we deliver to tens of thousands of buyers each year.
Q Safe and reliable energy supply: Will the demands of your business sector lead to more energy requirements? How would you like our government todeal with this? What do we need to do to ensure independence or sovereignty for this country in the future?
A As our population grows and demands more housing, energy consumption will increase. That’s a fact of life over which we, as homebuilders, have no control. The government needs to do its part, but I believe that industry is where the real innovation in energy alternatives and conservation will take place. At KB Home, we have introduced our first Zero-Energy Home option at our Teal Cove community in Oakley, Calif. A ZEH is connected to the utility grid and produces approximately as much electricity as it consumes, resulting in “net zero” consumption. [A] ZEH combines state-of-the-art, energy-efficient construction with commercially available renewable energy systems. Homeowners who choose the ZEH option over a non-ZEH home can generally expect to see savings of up to 60 percent on monthly utility bills, provided by a low-maintenance electrical system. They also are helping to reduce emissions by using less commercially generated power. It empowers our homeowners to do their part in helping the environment.
This kind of innovation, along with a renewed and strengthened commitment by the government to alternative energy sources will move this country away from dependence on foreign fuels and energy sources.
Average new-home size for single-family residences has been growing for decades, but so has the average price of a starter home.
Q Do you see a trend back to smaller starter homes as a response to the affordable housing crisis in many cities and suburbs?
A Affordability of housing is definitely an issue for both builders and buyers. As housing prices have soared over the past few years, we have had to look at new ways of getting people into the home of their dreams, whether it’s a starter home or the luxury home they’ve always wanted. At KB Home,we’ve approached this issue in a variety of ways, by diversifying our product mix so that we build houses that more people can afford and by partnering with lenders to find the best financing options for buyers. And, as I’ve mentioned before, we have worked within our industry organizations to help reduce the exorbitant fees and costs in new housing that come from government compliance and regulations. Housing prices, as we know, vary from region to region in the U.S., and many factors go into the price of a home. A one-bedroom condominium may be barely affordable for a young couple starting out in Los Angeles, while the same amount of money would buy them a sprawling three- or four-bedroom home in the South. Variety is the key to making housing available to more people.
In those pricier markets, we are seeing first-time buyers opting for our urban infill attached housing as affordable options. In other suburban areas, they may choose an attached townhome or condominium in a new KB community.
Part of Examiner’s The American Economy series.
