A homebuilding CEO on what’s wrong with the housing market

KB Home CEO Jeff Mezger says first-time buyers are coming back

TRD New York /
Jun.June 29, 2014 02:00 PM

 If you wanted to describe the housing market in 2014 in one word, it would be meh. Prices are still on the rise, and activity is above crisis levels. But the pace of activity still seems sub-normal, which is being attributed to a combination of: lack of supply, the difficulty of getting a mortgage, and subdued activity among traditional first-time homebuyers — but that might be changing, according to Jeff Mezger, the CEO of homebuilder KB Home.

The missing “first-time homebuyers” is a big source of discussion, as people theorize that the new generation just isn’t interested in homeownership. Or maybe they are interested in homeownership, but due to student loan debt and lack of jobs, they just can’t make it happen.

So what will get them into the housing market? Simple, strong job growth.

On his company’s quarterly conference call this past week (via Calculated Risk), Mezger said that there was some slight signs of renewed first-time homebuyer activity. During the Q&A portion of the conference call, Mezger was pressed on what specifically he was seeing. Here’s the key back and forth, where an analyst from JPMorgan asks for clarification on first-time homebuyer activity:

Michael Rehaut – JPMorgan

That’s great. I appreciate that. And I guess a second question for Jeff Mezger, as there are two Jeffs I have to distinguish. Jeff, you mentioned that in your opening remarks that there was evidence of a reemergence of the first-time buyer and I was hoping you could expand on that a little bit in terms of that if that’s something you are seeing in your own business itself and particularly given that you continue to perhaps shift to maybe away from the historically traditional first-time buyer more of a financially – more financially a stronger type of first time buyer that’s more financially able and more perhaps the move up community, so I was just wondering if this was something that you kind of saw specifically within your own business or if it was more just kind of general comments as it relates to perhaps mortgage lending standards or other trends that you see out there?

Jeff Mezger – Chief Executive Officer

Mike, it’s part of why I split it into the two different business dynamics we are dealing with today. In the higher income with land constrained areas I don’t know that our first-time buyer mix has changed. It’s a different first-time buyer I know it’s a higher income buyer than we would have seen 10 years ago. What I was trying to point out in the cities pick a Texas City because all four of the larger cities has solid job growth and real population growth going on today. And it’s a because of the job growth we are seeing more first-time buyers. They are not – it’s a well healed first-time buyer, but it’s not the high income first-time buyer like you would see in Orange County or up in the Santa Clara County. So I think it’s because you have job growth going on in those cities and that’s within our own business we are seeing this.

So it’s fairly simple. Where the economy is booming, like it is in Texas, you’re starting to see first-time home buyers.

This may seem head-smackingly obvious, but there’s an important point here about the state of the housing market in 2014.

Earlier this week, Stan Humphries the chief economist at real estate site Zillow said the housing market was no longer characterized by the distortions we saw during the crisis. The crash is over. The snapback is over. The era of large investors scooping up tons of distressed properties is over. And so forth. Now what’s left is a normal market, influenced by normal factors. And unfortunately, there aren’t too many places yet that are booming like Texas is. If the economy picks up in more parts of the country, then the first-time homebuyer will really begin to re-emerge.

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