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CEO panel: After shrinking in downturn, homes are getting bigger

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Home design has changed in recent years, allowing buyers to purchase homes they only dreamed of in the past.

After shrinking during the downturn, houses and amenities are growing with the help of low interest rates, said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc. (NYSE: HOV), at a CEO panel at Pacific Coast Builders Conference on Wednesday.

“In general, I’d say there’s almost been more home design change in the last five years than in any five-year period I can remember,” Hovnanian said.

He said there’s more emphasis on the great room, and the living room is “dying;” kitchen islands “are on steroids” and growing every day; and there’s no limit to the size of garages, accommodating two cars, three cars, four cars and oversized cars.

“In general, this is certainly helped by the rates, there’s definitely an itch for larger and larger homes than we ever dreamed would be logical,” Hovnanian said.

“In the beginning of the slowdown, houses shrunk and amenities shrunk. It was the complete opposite," Hovnanian said. "And then as rates came down, it was an opportunity for monthly payments … within everybody’s range. All of a sudden people could buy 3,000, 4,000-square-foot homes that they never dreamed they’d be able to do.”

David Weekley, chairman of David Weekley Homes, said the primary competitor is the resale home and it’s important to stand out from products.

His company went into a green initiative, putting in energy saving components and seeing an immediate payback.

“We’re doing a better job as an industry designing homes the way people want to live,” Weekley said. This includes single dining plans, open plans and office studies.

Jonathan Jaffe, vice president and chief operating officer of Lennar Corp. (NYSE: LEN), said Lennar looked to find what existing housing stock wasn’t providing, and found that to be multigenerational housing.

This product includes a suite concept, which is part of the home but has a separate entry, allowing for more privacy.

“Part of the good thing for all of us involved in the industry, it does mean slightly larger homes, so there’s going to be more square footage, more materials that go into it, more labor so I think it’s going to be a good thing for all of us,” Jaffe said. “And it’s going to appeal to the largest growing demographic in the country as the baby boomers age and their children have to figure out how to support them from a health standpoint, financial standpoint.”

In these situations, family members might combine payments, making housing more affordable, Jaffe said.

Weekley said he isn’t sure the active adult buyer is going to want to move into a separate retirement community and there’s a “ton of opportunity in approaching the active adult in a different way.”

During the recession, Hovnanian, Jaffe and Weekley all faced tough decisions, with layoffs and selling property for less than ever expected.

Weekley laid off two-thirds of its work force or 1,000 people — during the downturn. He was down to 600 people and is up to 1,000.

He said the company’s land discipline helped it get through the recession and the challenge now is to maintain that discipline and make sure there isn’t too much risk in each market.

Hovnanian said he went from a peak of 7,000 people down to 1,400, and is now up to 1,700.

“The environment created a need for efficiency for all of us,” Hovnanian said. During the downturn, he found ways to be leaner and will strive to stay lean as the cycle picks up.

Prior to the downturn, he said each geography had its own call center, employing 20 people around the country.

That is handled with one-third the amount of people today, and Hovnanian said he plans to keep the efficiency by maybe expanding from six to eight people, but not back up to 20.

Jaffe said Lennar cut 25 percent in terms of head count. The company had a strong balance sheet going into the downturn, but that was stretched to the max, Jaffe said.

“The key to our success in dealing with it was just recognizing what it was as soon as possible. … We also drank the Kool-Aid. It was an exuberant time,” Jaffe said.

“The key was to quickly recognize that times had changed — start selling land, start making the difficult decisions of cutting overhead so we could protect that balance sheet,” he said.

Hovnanian said he’s convinced the country is early in a recovery.

In terms of overall housing production, on average, there’s around 1.4 million per year and there is a run rate of 850,000 starts now.

“It feels fabulous," Hovnanian said. "If it was at any other time though than this part of the cycle, it would be the worst, devastating level of housing we’ve ever seen before.”

Jaffe said there’s a lack of finished, entitled home sites for builders to build on and the finished home sites picked up during the downturn have already been churned through.

Because the market is coming from depressed levels, Jaffe said the increase in sales prices is not a sign of a bubble and it’s a long way before interest rates start affecting the level of demand. Increasing rates mean the economy is getting better and jobs are stronger, Jaffe said.

He said a challenge is that people permanently left the industry in the last six year, making it important to recruit, mentor and train college graduates.

He mentioned that builders, trades, lawyers and lenders have slowed to hire and train.

“That’s one place I think we have to invest or else we’re going to find ourselves growing faster than we have the ability to support and make mistakes that are costly,” Jaffe said.

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