Right now, the only thing the markets care about is the war in Iran, and the news on the war keeps moving at a fast and furious pace. Hopes for a peaceful resolution seem to be fading. Another week, more bad news for private credit, and this process can lead to a recession. We are now going to show an interview I did with the CEO of a home builder, Meritage Homes. What are the major costs that prevent homebuilders from delivering, you think, homes at a lower price?
The reason affordability is so problematic in our country is because local regulatory bodies have no incentive or motivation to help us to bring land to the market in an affordable way. It's been happening for decades, but it's gotten worse and worse and worse, and there's been no solution to it.
Hi, this is Steve Eisman and this is another edition of the weekly wrap. This is for the week ending March 27 but recorded Thursday night, March 26. In this week's wrap, we will discuss one, the latest on the war in Iran. Two, more news on private credit. And three, we will then cut to an interview with the CEO of Meritage Homes, symbol MTH, a stock I recommended earlier this year.
Right now, the only thing the markets care about is the war in Iran. And the news on the war keeps moving at a fast and furious pace. Monday morning, futures were down 100 basis points. But then President Trump announced that he was postponing the bombing of Iranian energy infrastructure for 5 days because the US and Iran are talking. Futures soared. At one point on Monday, the market was up over 200 basis points. However, the Iranians denied that there were any talks at all and the market sold off some. It still closed up 1.15% but well off its highs. Tuesday after the close, President Trump announced that the US and Iran are negotiating and that the US had submitted a 15-point plan to end the war. Wednesday morning, Iran rejected this ceasefire proposal and called US talks, quote, illogical, unquote, and demanded control over the Straits of Hormuz. By Thursday, hopes for a peaceful resolution seemed to be fading. Now, it's possible that President Trump has just been using delaying tactics to set up a time for the US to take over Kharg Island, which is the key to Iran's economy. Until the war is over, the markets will continue to trade headlines. This coming Monday, we are posting an amazing interview with Steven Cook, who is a scholar and expert on the Middle East at the Council on Foreign Relations and has sources on the ground providing him with unique insights. And if you haven't seen my interview with Halima Croft, the head of commodity strategy and Middle East research at Royal Bank of Canada, I'd suggest you watch that interview this weekend before watching the Steven Cook interview on Monday.
Another week, more bad news for private credit. On Monday, the news was at Apollo. Its flagship $25 billion private credit fund called Apollo Debt Solutions received a quarterly redemption notice of 11.2% but only the 5% cap was honored. That was Monday. On Tuesday, Moody's downgraded the rating of the $13 billion private credit fund jointly run by FS/KKR. Moody's downgraded the fund to junk and when the company reported fourth quarter results a few months ago it showed that non-accrual loans had climbed to 5.5%, one of the highest in the industry, that caught the attention of the ratings agencies. Also on Tuesday there was bad news from the Ares $10.7 billion strategic credit fund. The fund received redemption notices at 11.6% of assets but only honored redemptions at the 5% cap. In related news on Wednesday, Barclays announced that it is scaling back its asset-based lending to small borrowers after facing losses from the collapses of Market Financial Solutions and Tricolor Holdings. Barclays is shifting its focus to loans and securitizations for large corporates and has already pulled back on some deals and increased pricing to reflect higher risks. If you take one thing away from this wrap, focus on this. These patterns signal the beginning of a credit cycle. This is what it looks like. Bad news starts to mount and then lenders begin to tighten underwriting standards and to restrict credit to at first certain borrowers and more borrowers over time and this process can lead to a recession.
I am keeping this wrap short because we are now going to show an interview I did recently with the CEO of a home builder, Meritage Homes. This is a stock I recommended in January. My thesis was that Meritage is a well-run midsize homebuilder that was then trading at tangible book value. The range of valuation for Meritage is 50% of tangible to one and a half times. Thus far, my recommendation has not played out. Why? The one thing you can't get away from with respect to homebuilders is interest rates. When I recommended Meritage in January, the 10-year was a little above 4% and it looked like it was going lower. However, because of the war, the 10-year has climbed to as high as 4.4%. And Meritage is now at 80% of tangible book value. I still like the stock because this is a profitable company, so tangible book value should continue to grow. But I will admit that right now fundamentals are being hurt by higher interest rates. That could of course change very quickly.
I really have always liked examining home builders. I find them fascinating companies. It's an industry that has changed dramatically over the years. This is one of the better midcap companies. Most people haven't really heard about it because most people just focus on LEN, PHM, DHI, NVR, and Toll and forget the rest. But I think there's real opportunity here which is one of the reasons why I recommended it about a month and a half ago and I full disclosure I own this stock and I think we're going to have a very interesting conversation with the CEO. Before we begin a technical announcement, Philippe had some difficulty joining the video and so as a result he had to join on his phone. The video quality for this interview is not up to our usual standard. The interview itself, however, I think is a very good interview, very informative, and we decided to forge ahead. I think you're going to learn a lot, and I'll be back afterwards with some conclusions.
Today, we have as a guest the CEO of a company that I actually recommended as an investment about a month and a half ago, Meritage Homes, which is a home builder. And today, as our guest, we have the CEO, Philippe Lord. So, Philippe, welcome to The Real Eisman Playbook.
Thank you very much. Very happy to be here. Looking forward to the conversation.
Great. So, you're a five billion market cap company. Before we get into the specifics of your company in particular, why don't you just give our viewers an overview of the state of the housing market in the United States right now from your perspective?
So, we're coming off about 5 years of pretty unprecedented demand. You know, we came out of COVID and everyone understands that there was a big surge in demand coming out of COVID. Rates went down substantially. It freed up a lot of affordability. A lot of people bought homes during that period of time. A couple years later, interest rates went up. It really locked in the existing home market. So, new home demand continued to be very strong. And that's really lasted the last, you know, pretty much through, I would say, the middle of last year.
So, new home demand was strong, but existing home sales was not good. It was kind of a dichotomy.
Yes, sir. We had a captive audience. I think everyone that bought since 2016 bought at a very low rate. So, they were kind of locked into their homes. They couldn't really make the math work. As rates started to rise, it didn't make a lot of sense. So, people stayed in their homes for longer and the new home public builders and private builders really had a captive audience for those folks who were out shopping during that time. I would say that that was generally true all the way till the middle of last year. And I think the other thing I would share is just overall the country is pretty underbuilt since the Great Recession. Home builders backed off and a lot of people didn't bring lots to the market and didn't bring a lot of supply to market. So there was a lot of pent-up demand coming out of the Great Recession and we really underbuilt in this country. So you couple that with what happened over the last 5 years and you had some really strong numbers coming out of it.
For new homes. Yeah. And I mean I think during the early part of those five years it was strong for existing homes too. The existing home market got eaten up. It wasn't really till rates started getting elevated in the middle of 2023 and in 2024 that the existing home market started to shrink, if you will, and the new home market really continued to go forward as a captive audience.
What you're saying is the existing home market deteriorated as rates went up. You as a new home builder and your peers had sort of a captive market because there was no place else to go. And you said that lasted to basically the middle of last year. Why did it then fade?
Yeah, I think it's a confluence of three things. And really, you know, the housing market, there's three legs to the housing market stool. There's job growth in the economy. If there's jobs being created and people's income levels are going up, you know, people tend to be buying homes. And then there's affordability. When rates are low or prices are low, more people can buy homes than if rates are high or prices are high. And then finally, there's consumer confidence. And really, consumer confidence is just how optimistic these folks are on sort of what their future prospects look like. Affordability has been an issue since the middle of 2023, but new home builders have really been solving that by buying down mortgages for our customers.
So, let me explain that to the viewers. I don't think everybody understands that. So, just so all the viewers know, companies like Meritage have their own mortgage company. And so, if you go buy a home from Meritage or LEN, you get a mortgage from them. And if you went outside, let's say to Wells Fargo, you might get a loan at 6.12%, but the homebuilders will subsidize through their captive mortgage companies. So instead of paying six and a half percent, I'm just making up a number, they buy you down and it's basically as part of the price of the house but the mortgage rate is 5.5%. And so you get a much better rate from the captive mortgage company and that's one of the reasons why the homebuilders did so well for so long.
Yeah, that's exactly right. I couldn't have described it any better. Through our JVs or our wholly owned mortgage subsidiaries we're able to access the capital markets and buy people's rates down with points. It's expensive, but we can unlock affordability for people. And as rates rose, we used that lever to really continue selling homes up until the middle of last year.
Okay. So, going to the middle of last year, what happened? What was the pain point?
That was where consumers started feeling much less confident. It was a combination of I think the job market going a little bit sideways. Even though the data suggests that things are still very strong, I think they're very strong in certain sectors, but they're not that strong in other sectors. We're focused on affordability. So, those folks I felt the job market was shrinking. I believe that you had the government shutdown that happened in the middle of the back half of last year that really impacted people's confidence and then just the overall uncertainty out there around the economy and some other things has really impacted the consumer psychology and this is common knowledge, you know, the indicators out there that track consumer confidence, it's at an all-time low since we've been measuring it and I think that all really changed in the back half of the year. And so now we're dealing with still having the affordability issue. The job market seems to be weakening a little bit for some people and now the consumer is not feeling very confident about things. And so the back half of the year was not a good year for a lot of public home builders. Our numbers were down. Sales, revenue, margins were getting compressed from incentives and rate buys, which we just discussed. And overall demand had just really really softened. As we roll into this year, that's still the environment. Although it's the spring and most of home buying activity happens in the first half of the year. People tend to just go out and buy homes during the spring. They get their bonuses. They're feeling better about things. They're looking to move and whatnot. We still feel like the backdrop is low consumer confidence. The backdrop is still high rates even though they've come down from like the sevens into the sixes. And I think the bigger concern right now is just there's some negative news coming out of the job market. You saw the job report today.
Yeah. Just so everybody knows, because this is being recorded, the day he's talking about is Friday, March 6, and the job numbers were actually negative for the first time in a very long time.
Yeah. And frankly, our consumer base was kind of telling us that in the fourth quarter when we were surveying the people that were coming into our communities or onto our website or whatever, what they were telling us was that they weren't feeling great about things. And when we asked them what we can do to convince them to buy a home today and make that decision, there was kind of a lack of urgency and sort of a wait and see.
So, that's a nice lead in. Let's turn to your company. You focus on entry level. I'd like you to define that. Tell us what regions you're in. Tell us how you focus on the entry level market. What is that price point? Give us a general overview of the company and the strategy.
So, we're the fifth largest home builder in the United States. We did approximately 15,000 units in 2025, which makes us the fifth largest builder by units, not by revenue, but by units. We build essentially all across the southern hemisphere of the United States from California into Arizona, Utah, and Colorado. Then throughout all the four major markets in Texas, we build in the coastal areas of Alabama, Mississippi, and Florida, all four major markets in Florida, Atlanta, Georgia, the Carolinas, South and North, and then up into Tennessee. So, we're a southern hemisphere builder. We focus on markets that have lots of job growth. Hopefully, are pro-growth from a land perspective. Preferably low regulation with the exception of some of the West Coast markets.
And where affordability has really driven a lot of the demographics, which was the case in all those markets, we believe were affordable as it relates to some of the intermigration patterns in the United States. We're focused on affordability. That's the name of the game. Everything we do operationally is focused on trying to deliver affordable product. We typically like to operate below FHA.
What does that mean? You like to operate below FHA. What does that mean?
So FHA is the Fannie price level for a market. If you price your homes below that FHA limit, which is usually based on local incomes, that's how they usually set it, and then the median home price in the market, you have access to Fannie and Freddie financing.
So you're building homes that could be financed through Fannie Mae and Freddie Mac. You're not building homes like Toll Brothers that are jumbo, that someone would have to take out a jumbo loan or pay cash, etc. So what's your price point? Tell us about what your price point is.
So our ASP last year for the entire company was right under 400,000.
And that must differ by region.
Exactly. I mean the West Coast is higher.
How much? I'm very curious how much higher.
We still focus on affordability in Arizona, in Colorado, in Utah, and in California, but those prices are just higher.
And Alabama, what's the price there?
I think our ASP in Alabama, Mississippi, and kind of the coastal panhandle of Florida is closer to 300.
Wow. Okay. That's a big disparity.
So, let's explore that for a second. Why is there such an enormous disparity? I would imagine, and correct me if I'm wrong, you're building basically the same home in California as you are in Alabama. And I would imagine, and again I'm not sure how much the cost differs, but why is the price — let's imagine it's 550 versus 350, that's an enormous percentage difference for essentially the same home. Why is that?
Yeah, I would definitely take California out of the conversation. The statement that we're building the same home across the rest of the markets is probably true. We traditionally build a single family detached home which is a 30-wide house or a 40-wide house or a 50-wide house, which is the width of the home, and it's a single family detached home. So it doesn't share walls. It's not a condo. It's not a townhome.
And how many bedrooms is it usually?
Somewhere around three to four bedrooms and two to three bathrooms is kind of the sweet spot.
For us, that's really again focusing on affordability. But your question about why we can deliver product at these different ASPs from region to region all comes down to the land, the cost of the land.
Right. The cost of the land in California is meaningfully higher than the cost of the land in Alabama, meaning higher than the cost of land in San Antonio, Texas. We can put a traditional lot on the ground in most of our markets for a price that allows us to deliver an ASP of somewhere between 300 and 400,000 dollars, which we believe is the sweet spot in the market. We believe that's the most underserved portion of the market. The strongest demographics that are coming through the system are looking for that type of home — the millennials, Gen Z, the folks behind them, even affordable people that are moving out of other parts of the country are looking for something more affordable. And that's where the demand is. And frankly, that's also where the underbuilding occurred. Most of the building that happens in our country is over half a million dollars. It's not under a half a million dollars. So at Meritage, we're focused on delivering product below half a million dollars across the country. Again, we think that that's the sweet spot. That's where people are struggling. Those are the folks that are struggling to attain home ownership. And so our mission is to really try to figure out how to deliver that to them.
Let's dig a little bit more down into affordability. You know, there's a lot of articles written about affordability and housing over the last several years. Why do you think — I mean, you're the builder so you must know — what are the major causes? I mean, why can't we build your home for less in the United States? I mean, 350, 400,000 is not bad, but if it could be built and sold for less, obviously you could sell more homes. What are the major costs that prevent the home builders from delivering, you think, homes at a lower price?
