Meritage Homes CEO Steve Hilton
Courtesy Meritage Homes Meritage Homes CEO Steve Hilton

During his 33 years as a home building executive, Meritage Homes CEO Steve Hilton has experienced the market's many ups and downs. As leader of the Scottsdale, Ariz.-based company--No. 8 on the Builder 100 list with 7,709 closings last year--he keeps an eye on factors like the economy, interest rates, the labor market, and consumer demand. He was recently named CEO of the Year by the Phoenix Business Journal.

Here, Hilton talks with BUILDER about how he's preparing the firm for challenges and opportunities in 2019.

Economists and other experts have talked recently about a downturn in the housing market. What are you seeing in the areas where you build?
We’ve seen a pullback in demand over the last couple of months – to varying degrees across our markets. The greatest impact has been in the highest-priced markets and communities such as California and second-move-up communities priced well above FHA & GSE loan limits.

We believe we’re going through an adjustment period – a pause as buyers are adjusting their expectations as to what they can afford and sellers adjusting their expectations on what they can get for their homes.

Are you worried about another downturn? How do you protect against one?
Cycles are an unescapable reality in the housing market. Anyone who has been in the home building business as long as I have recognizes and plans for that.

We’ve been in a long period of growth since 2011 – yet national building volumes are still not back to their long-term averages. The economy is strong – job growth and wage growth are the most critical factors that drive demand for homes, and they’re still increasing. The unemployment rate is very low, household incomes are higher, interest rates are still low by historical standards even though they’re up from where they bottomed, and consumer confidence is high.

Mortgage availability has remained relatively tight since the last recession. During the previous boom period, mom-and-pop investors and flippers were purchasing properties at peak prices, looking to quickly convert back to cash and make a profit. That is almost non-existent today.

Available inventories of homes are low in most markets and affordability is still good, though it’s become stretched in some areas. Home prices have risen broadly for years now and interest rates have also risen 88 basis points since the beginning of this year, which translates to an 11% increase in mortgage payments. We began planning for that a couple of years ago, when home prices were still rising and interest rates hadn’t yet begun to increase.

Most builders – including Meritage – were at that time primarily focused on move-up buyers, since that’s where the greatest demand was earlier in this cycle. There was very little inventory of homes for first-time buyers, including the millions of millennials who were just entering their peak home-buying ages. Understanding all of that, we made the strategic decision to shift our focus to offering more entry-level homes that would be affordable for first-time buyers, as well as first move-up buyers who may not be able to afford the homes being built in many new communities.

Entry-level communities now make up about one-third of our total, and 43% of our sales in the third quarter were entry-level homes. More than half of our total lot supply is for additional entry-level homes. We believe that positions us well as the market shifts away from higher-end move-up and toward more affordable homes.

Is prefab or panelized building something you’re considering on a larger scale?
We’re always exploring opportunities to improve our homes and reduce the cost to build them. We have been an innovator, most notably by leading the industry in energy-efficient home building. We’ve done a pilot program with panel manufacturer HercuTech in Phoenix and Orlando, and we like their product. We believe there are many advantages to panelization in the construction of homes – faster build times, less waste, fewer errors – and the potential to lower costs. We already use manufactured trusses widely and plan to expand our use of them in more communities.

There are also opportunities to capture many of these advantages through pre-cut materials delivered directly to the job site. We are actively engaged in finding cost-effective mechanisms to incorporate panelization or pre-cut packages across our geographical footprint.

How have rising material prices affected Meritage? What are your strategies for dealing with those higher costs?
Rising costs have been partially responsible for driving home prices higher. They have also limited our margins. Lumber prices rose more than 60% earlier this year, which had a negative impact on the entire industry before they came back down over the last few months. We are actively re-bidding our lumber contracts to capture the lower costs for savings as quickly as possible.

We work closely with our suppliers to get the best value for our customers. That includes determining which products our customers prefer and negotiating the best prices for those, consolidating purchasing with key suppliers to get better volume discounts, and changing the way we build to allow for greater efficiencies, which has also helped reduce our overall construction costs for our home buyers.

What are the three new ideas you hope to explore in 2019?
I already mentioned increasing our use of manufactured trusses, which we intend to do in 2019. We’re also offering more technology to make our smart homes function better and are exploring ways to help our homeowners utilize those technologies more to their benefit.

And finally, we are opening more advanced design studios across the country to simplify and streamline our customers’ experiences in personalizing their homes. We call them Studio M locations.