Common Stocks and Common Sense

6 CENTEX CORPORATION

In the late 1990s, U.S. Home’s revenues were growing faster than I had projected, and the company was gaining market share. For example, in 1999 the company sold 12.0 percent more homes than in 1998, while the total number of housing units built in the United States increased by only 1.5 percent. My curiosity was aroused, so I checked the recent growth rates of other publicly owned homebuilders. They also were growing much faster than their industry. What was going on? If the public homebuilders were growing faster than their industry, then the private homebuilders must be lagging. Why were they lagging? I picked up the phone and called a friend who built a few homes each year in lower Westchester County. My friend thought that my inquiry was ill informed—in fact, dumb: hadn’t I ever heard of the S&L crisis?

In the 1980s, savings and loan banks (commonly known as S&Ls or thrifts) were badly squeezed by high interest rates. Many of the mortgages that the S&Ls issued in the 1960s and 1970s were at fixed and relatively low interest rates. Then, in the late 1970s and in the early 1980s, interest rates increased sharply. To attract the requisite level of deposits, the S&Ls were forced to pay high interest rates on deposits. As a result, their net interest margins often were insufficient to cover their overhead expenses. Furthermore, when the real estate market softened in 1990, many of the loans issued by the S&Ls went into default. The S&Ls were in deep trouble. ...