BB: Why don't we start with the early years, and then you can take us up through Kaufman and Broad's French expansion?
EB: Let's talk about how Kaufman and Broad started. I was a young CPA at the time. And I had clients who were home builders that I didn't think were very bright, frankly, making a lot of money. And I sort of said, "Gee, I can do that." As a CPA, I was only making about $75 a week. They were doing quite well.
So, I teamed up with Donald Kaufman and we formed Kaufman and Broad Home Corp., or rather Kaufman and Broad Building Co. And what we did was we studied home building and what was happening in cities outside Detroit-Dayton, Ohio, Indianapolis, and elsewhere-Columbus, Ohio-and found that homes were being built without basements in those areas but with garages or carports, whereas in Michigan, houses were being built with basements, which goes back to the days where you had coal-fire furnaces and you need a place to put the coal, so you'd put it in the basement. So we said, "Gee, we think, if we offer a home at a lower price, without a basement, with a carport, we'd do very well." The conventional thinking was that it would never sell; the conventional thinking turned out to be wrong. In fact, the established builders who had been around and done very well during the fat years after WWII, they said, "We're just going to go broke."
So, we opened up and the first weekend we sold 17 houses.
BB: Seventeen houses in the first weekend? I think that's pretty good today?
EB: And the price was $13,740. But I think veterans could move in with no down payment just closing costs. And then we had FHA financing, which I think was 3 percent down at the time. And we were off and running.
So, we went from one subdivision home builder quickly to a multi-subdivision home builder. And then as you know, within three years, we then expanded first to Phoenix, Ariz., then about that same time, we went public. I guess it was November of 1961. And by the way, we were the first company in the home building industry to be listed on the New York Stock Exchange.
BB: And the American Stock Exchange, right?
EB: The American and then the first one on the NYSE. So, we really led the way. There were hardly any public companies then. This was long before Centex, Lennar, Pulte, and others. So, we were really the first of the public companies.
We had a number of other firsts. When we started in business, all home builders were using construction loans, which meant they had to pay two points up front and a high interest rate. We convinced the banks to lend us money unsecured. So, we're the first company in our industry, I believe, to borrow money unsecured from commercial banks. Then we got ratings from Standard & Poor's and were able to sell commercial paper, which also saved us lots of money.
What else can I tell you about the early years?
BB: Can you tell me a little bit about Donald Kaufman?
EB: Donald Kaufman had a very different background than I did. As I mentioned, I was the youngest CPA in the state of Michigan. Donald Kaufman was 10 years my senior. He started life as carpenter, a carpentry contractor, went into remodeling, and was a small home builder at the time when joined forces. So, he was responsible for what I call the field operations, construction, and I was responsible for marketing, finance, and general administration.
Donald Kaufman, frankly, as we became larger got disinterested in the business. And in early the early 1960s decided to retire.
BB: Can you tell me a little more about his personality?
EB: My wife's first cousin was Gloria Kaufman, who is married to Donald Kaufman. In fact, we were both wed, we both were married the same week in Detroit, Michigan, in December 1954.
We had another of other firsts. Our attitude about home building was that we were manufacturing merchants and land is just your raw material. And we saw ourselves as producing a product like a manufacturer as opposed to feeling we were real estate developers or owners of land. So, it was a very different approach to business.
And we started with entry-level housing, which meant we were selling to people who were in two bedroom apartments and offering them a home at less than they were paying rent.
Then, we were the first to introduce townhouses in a number of places, including Southern California. I think it was probably about 1963, in Huntington Beach, we sold like 600 townhouses in like two weeks, which was some all-time record. And those townhouses started at $9,900 and went up to $15,000. They were from 1 to 4 bedrooms.
BB: And they were in how many cluster units?
EB: Well, each cluster of townhouses probably had about a dozen or 15 units in a row.
Then you were asking about our French expansion... We were fascinated with what was happening in Paris. We were not the first home builder in Paris. The first home builder in France was Levitt [& Sons]. Levitt was first, but we followed that quite closely. And often when you're first, you get a lot of arrows in your back. After we saw Levitt's success, I spent a lot of time in France and created Kaufman and Broad France, which became a big success. Levitt after one or two years left France. We are still there to this day. The French company became publicly owned by itself on the Paris Bourse, the Paris stock exchange.
We would follow the autoroutes. We first started building along the autoroute west and then we built north of Paris, east of Paris, south of Paris, and then also started some divisions in the provinces, in Aix-en-Provence, which is north of Avignon and that whole area. So, those were very exciting days.
And what we offered was really American-style homes on the interior with French exteriors. These were the days in France when it would take two years to build a house and then you would get the house without any cabinets, or closets, or light fixtures. We offered a total package, with great success.
So, we really industrialized home building in France. And we also were in Belgium and Germany and Canada. And what happened in Germany, in Europe, I think it was 1973, when they had a big energy problem and they banned people from driving on Sundays and all sorts of things and ran into a recession. So we consolidated our operations just in France.
I forget what year we entered Canada. Initially we entered Toronto [in 1970] and we bought a company, a Canadian home building company [Victoria Wood]. And that was quite successful.
BB: Is Victoria Wood still around at all today?
EB: I really don't know. I've been away from the business for 15 years. I don't know if they're around and in what form, but they're not owned by Kaufman and Broad or KB Home.
We had all this expansion in North American and European markets and then we consolidated just in the United States and France.
BB: Can you tell me how you met Bruce Karatz?
EB: Well, Bruce Karatz was one of many bright, young people I hired. I was probably the only home builder recruiting at Harvard business school, amongst other things. And my deal was to get a lot of very bright, accomplished people. Bruce's background is as a lawyer. He was at the Securities and Exchange Commission. And I hired him to do what we then called forward planning-he didn't want to practice law, really-which was acquiring land and putting deals together. And he did that for the Southern California division. And then when we were expanding into France, I convinced him and his wife to go to France. He headed the provincial division in Aix-en-Provence. And then after several years, I made him president of the French company.
BB: When you think back to your first impression of him, what was it? He's just as much of a personality in some ways in this story as you are, so I would've just loved to have been at the moment when you're looking at this young guy and saying, "Hmm."
EB: We always had very bright, young people unlike other home builders who would go for go for more of the veteran types during those years. Bruce was very energetic and had a good work ethic. I was in France and I took a chance and promoted him and made him president of the French company. I forget what his age was, 29 or something.
BB: It seems like there have been a lot of points in your career where you did unconventional things that ended up being very advantageous for you.
EB: That's true. Does the Council of Housing Producers mean anything to you? What happened, I think in the early 1970s, was I founded something called the Council of Housing Producers and took the largest builders in America-some public, some non-public-and because our interests were different from the average home builder with the NAHB.
BB: So, is this the forerunner to the High Production Builders Council?
EB: Yes. I created that and chaired that. I also worked directly with HUD, when George Romney was secretary. We were the first involved in Operation Breakthrough, if that means anything to you. That's something that Secretary Romney had; he wanted to get lower cost housing, make housing more efficient. He created this Operation Breakthrough. Then as you know, we went into the manufactured housing business and at one time had 11 plants across America.
BB: You diversified, not only into manufactured housing but several other industries?
EB: Although we did very well, and I tried to convince Wall Street that we would do well in bad times, which we did mostly. But in a cyclical industry, I decided during a slow period that we had the ability to get franchises for cable TV. And I had a friend who was at RCA at the time, an engineer who headed that division. And that did very well.
But the biggest thing we did was acquire Sun Life Insurance Co. of America, founded in 1890. And that was after [I did a personal study] of what types of businesses survived the Depression. Home builders obviously all went broke. Banks went broke. Savings and loans went broke. Mortgage companies went broke, but the one industry that survived the Great Depression was life insurance. So, we went hunting for a life insurance company and acquired Sun Life Insurance Co. of America, which became Sun America. And then after two years, I decided to change from a traditional death-benefit company to a retirement savings company. And it became much larger than KB Home in terms of market value and the like.
BB: What was happening in the market that it was the "right" time to make that move to diversify?
EB: At that time, we had a market capitalization of $1 billion in the early 1970s. And that was unusual. We had the P/E ratio of any company in our industry. I think we were selling at 35 to 45 times earnings based upon the record we had and the respect we had from Wall Street. So, I said, "Let's use some of that capital to diversify." And that's when we bought Sun Life. And that story? we split the company in two and Sun Life merged about eight years ago for $18 billion to American International Group. Sun America was the best performing stock for one decade on the NYSE.
BB: It was a good thought to have done that study of the post-Depression marketplace.
EB: I'm a great student; I do a huge amount of reading. I said, "What happened during the Great Depression? Who survived and who failed?" It was with that background that we decided to acquire a life insurance company. So, I did a lot of reading and so on, which is what I did before we entered the home building industry also. I got every piece of literature I could. In those days you had House & Home, Professional Builder magazine, and others.
BB: So, did your being a great student have anything to do with KB growing the reputation as being a very data-driven company?
EB: There's no question that unlike other builders at the time-and the industry ahs become far more sophisticated and it's a very different industry today than it was when we started-I think we were always ahead of the curve in studying data and having very bright, young people and doing things differently, not accepting conventional wisdom. Remember we were the first multi-market home builder, first coast to coast, and then first multi-national home builder.
BB: Why were you so fascinated with the Paris market in those early days?
EB: It was the largest city in continental Europe. We saw someone [Levitt] who had great success there. We thought we could have larger margins there than in the United States. It was all for economic reasons; it wasn't about the glamour of going to France, which one year I went 11 times from the West Coast.
BB: Wow, that was a lot for one year.
EB: It sure was. I remember the flights well. We'd leave at 11 o'clock at night, if I recall right, and we'd get there 5p.m. the next day on Air France. I was probably their biggest customer from the West Coast. I tried to sleep and do a lot of reading.
BB: Can you talk a little bit more about your philosophy of the company being a manufacturer, with land being a raw material?
EB: I don't think anyone else had that philosophy at the time. [But] I think the way most of the major home builders are operating today, whether it's Lennar, Centex, Pulte, or others, I think the roots of all their major policies and the way they operate came from what we did. I remember when Bill Pulte called me and said, "I'm thinking about going public." I remember meeting him in a hotel in Detroit to help him do that. And [there were] others.
BB: Why didn't you ever buy Levitt?
EB: Levitt merged into ITT. And I knew all the people at Levitt. By the time they wanted to get rid of it, we didn't see any great advantages in buying Levitt. They had already built all the Levittowns, so those were gone. They were in France and a couple other places. They weren't any longer what Levitt was originally, which started out as the huge communities in Long Island, Bucks County, Penn. The early history [of the company] was extremely rich right after WWII, with what they did in Long Island and what they did in Bucks County, Penn., and one or two other places, and the fact that they were the first in France.
BB: Looking back, are there any deals that you wish you would've done that you didn't?
EB: In home building? Not really. We looked at acquiring other home builders, one was the Lusk Corp., which is long gone. They were likewise a public company, but after doing our due diligence, we decided not to go ahead. We thought, given our style was different, that we could do better with internal growth than by acquisition.
BB: Was home building as localized as it is today, where you need to know every link in the chain to get an entitlement through? Or was it easier to just start up operations?
EB: It was localized, as far as getting all the entitlements. Each market was somewhat different-what you could do in the Midwest, you couldn't do on the West Coast, and what you could do in West Coast, you couldn't do on the East Coast and so on. Each required different products.
But we were the first to really get involved in national purchasing. We'd make national deals on appliances-and I think we were the first to do that-with General Electric and others. I think we're the first to make national deals on wallboard with U.S. Gypsum and others. So, we tried to use our purchasing power rather than buy everything locally.
BB: That's pretty amazing that you did that at the time.
EB: It was. But we did a lot of things differently in those days that KB Home is still doing and now other home builders are doing.
BB: When you look back at your career, what are your proudest moments?
EB: The proudest moment was, when you start a business, succeeding, because the majority of the businesses started don't succeed. [laughs] So, the first proudest moment was coming up with a product that people said would not sell and that we'd go broke, and the first weekend, like I said, we sold 17 houses. And I did very well. It allowed me to become a millionaire before I was 30. Remember when we went public, I was 28 years of age. When we were listed on the NYSE, I was 30 years of age.
I'm proud of that and proud of the fact that we were able to help people get out of garden apartments and into homes at less than the price of their rents. Monthly payments were less than their monthly rents.
I'm also proud of the fact that I probably created at Kaufman and Broad more millionaires than any other company in the industry. We did not pay the highest salaries, but we gave everyone stock options. And we wanted everyone to act as an owner. We ran a very tight ship. Everyone flew coach, including myself. We were not extravagant.
BB: Flying coach on that flight to Paris from the West Coast must've made for quite a trip.
EB: Well, you do what you have to do. We'd try to get two seats next to one another and other things. But we ran a pretty tight operation, and I tried to set an example for all the troops. The company never owned an airplane or anything like that.
BB: Were you ever in the military? Lead by example is a core military principle?
EB: I was in the National Guard [in Michigan] but never in the regular army or air force. Other than summer training camps, I was never deployed overseas.
BB: What made you expand into Phoenix first?
EB: Detroit was a very volatile market because the auto industry had good years and bad years. And it went from 40,000 housing starts a year sometimes down to 14,000. And we said, "We've got to find good markets to expand into." So, we looked at Florida. We looked at California. And frankly Los Angeles at the time was fairly? I didn't understand Los Angeles. It was so big. You'd go from Ventura County to Los Angeles County and it was like 100 miles and so on. Then we looked at Arizona. And Arizona we could understand. We chose Arizona first. And I remember the first homes we built? The ad said: "Live like a movie star. House and pool: $9,900." Three-bedroom house with a swimming pool for $9,900.
And frankly, in all my years, we never had the perfect storm that home builders have had in the past five, six years. And what I mean by that is we never had the psychology that a home is a great investment. It was ok, but you know, in the past five, six, seven years, people were disenchanted with the stock market at the time, and they saw homes going up in price 10 percent or more a year. We never had the benefit of the low interest rates coupled with all these different types of mortgages. When we were around, you had FHA financing, VA financing, and other than that, you needed 10 percent or 20 percent down. You didn't have all these teaser rates or adjustable-rate loans. So, it was a very different business then.
And I think it's going to return to some of those basics again. I think the industry is going to pay the piper for all the excesses of the past few years-not caused by the industry, but caused by? For example, you've got two million ARMs out there. I wouldn't be surprised if one million people were either foreclosed out or left those homes.
And the reason for that is if you're a buyer, an owner of a home, and you got your mortgage from X-Countrywide or whoever it was-you go back to them and say, "Look, I'm having problems. Let's see what we can do to modify the loan." They can't do it because they've securitized it. And one tranche is in China, one tranches is in Europe, another tranche is with a pension fund in Louisiana or somewhere... So the whole business changed. When we were around, people originated loans or they sold them to Fannie Mae or Freddie Mac. So, if there was a problem, the borrower and the lender could get together and work it out. Right now, that's not the case.
Once you securitize a group of mortgages, you have people who have different interests. The highest rated tranche has a very different interest than a lower rated tranche does. So the question is? for example, if you're a homeowner, and you bought a mortgage in good faith in 2005 or 2006 with very little down and you got an ARM with teaser rates. And then people tell you that your mortgage payments instead of being $1,200 are going to be $1,800, you say, "I can't afford it." You go to the lender, but the lender really can't help you. And then you realize, you say, "Wait a minute, what is my house worth today versus what I owe?" And you've got a situation where, in many markets now, what is owed on homes with these low down payments, the home is worth less than the mortgage.
That's not throughout the country, but in certain markets. It's going to be a two- or three-year adjustment, in my view, before things return to somewhat normal. And I think we're going to see a different situation. Yes, we're able to get more people into homes. Homeownership rate reached a peak as a result of all of this. But I think we're going to get back to more normal business, where you're going to need 5 percent or 10 percent down to get into a home.
BB: Do you think there is a limit to how high the homeownership rate can go?
EB: I think it's still the great American dream, and I think it can stay in the high 60 percent. But you've got another situation where as a result of the economy and free trade and so on, the gap between the middle class and the poor and the gap between the upper middle class and the poor keeps widening. And with all the manufacturing that have left? Our buyers in those days had good, high paying, union manufacturing jobs; they're gone now. You've got an entirely different demographic and obviously you've got a different situation. When we were around, you had far more what I call traditional families, married one and a half children, etc. Now you've got very different family structures.
BB: Do you still think that the future of home building is with that entry-level buyer, like it was for you?
EB: I think it's going to come back, but I think you've got a major period of readjustment until you work off all these inventories further. The psychology will have changed and people won't see as they have as a great investment, which can go up 10 percent or 20 percent a year. And we'll go back to normal business, which means people will buy if your monthly payments on a fixed-rate mortgage are reasonable. They can afford their payments and it compares favorably or comes close to rent.
Learn more about markets featured in this article: Los Angeles, CA.