Homebuilding Business Strategy In The New Normal: My Interview With A Veteran CEO

I had the opportunity to chat at length with Steve Hilton, the outgoing CEO of Meritage Homes MTH. Instead of looking back on his stellar 35-year career, this conversation was about the future, and about homebuilder strategies.

Meritage Homes Corporation, a leading U.S. homebuilder, announced in September that Steven J. Hilton, co-founder, chairman and chief executive officer of the Company, will be retiring as CEO effective January 1, 2021, but will continue to provide guidance and oversight in his role as the executive chairman of Meritage’s board of directors. Phillippe Lord, currently chief operating officer of Meritage Homes, has been appointed to serve as CEO upon Hilton’s retirement.

Mr. Hilton has served as chairman and CEO since co-founding the Company in 1985. Meritage Homes is currently celebrating its 35th anniversary under Hilton’s leadership and has grown from a local startup in Scottsdale, Arizona to its current position as one of the largest and most respected national public homebuilders in the United States.

Brad Hunter: Steve, I’m seeing evidence in my research that home buyers are more concerned than ever about being healthy in their homes. How do you see builders in general, and Meritage in particular, addressing these concerns?

Steve Hilton: We have been building healthy homes for years, but we are now vetting out new systems that will make homes even healthier. For example, we are adding new HVAC (heating, ventilation, air-conditioning) equipment and filters that surpass the current industry standards to keep more virus and bacteria-sized particles out of the house. We are also utilizing spray-foam insulation in the homes, which keeps dust from coming through the walls. It’s a better barrier. Plus, we are continuing to vet other technologies as well.

Hunter: How has the selling process changed?

Hilton: We use contactless selling. As you know, 95% of our buyers start their search online. Today, you can get qualified for a mortgage online, and tour the models virtually. You can see how the homes feel, because it’s a robust virtual experience. Buyers can see the views from each lot in many communities. Then, the selection of carpets, cabinets, and other finishes can be done online too.  We can even collect your deposit completely electronically in a secure manner, as well as sign all of the required documents remotely.

Hunter: Demand for homes had already been ramping up for years, as the Millennials started families and started to want homes in the suburbs, and then the pandemic put the demand for the suburbs into overdrive. How do you see the impact of the Millennial generation on the homebuilding industry?

Hilton: The flight to the suburbs is a major trend. One thing that has changed very recently is that telecommuting makes more remote suburban locations feasible. But even before that, businesses started moving to the suburbs, so a lot of the jobs are out in those areas now. The close-in locations are too expensive for first-time home buyers. You have to look at more distant suburban locations.

We evolved our business 4-5 years ago with our new strategy. We have our LiVE.NOW brand, which is 100% spec; everything is preselected by professional designers. This saves on cost that we can pass along to the buyer, and gives them a designer-curated home at affordable prices. Millennials also care about the environment and energy efficiency, while wanting technology integrated into the home, both of which are featured in our homes.

Hunter: I’m doing a lot of market studies for groups building homes for rent. This niche of the market is booming now. Do you see BFR (built-for-rent) being competitive with entry-level homes?

Hilton: No, it doesn’t compete, because it’s cheaper to own than to rent, with mortgage rates this low. When you rent, you r money working for “someone else.  You aren’t building equity.

Hunter: Over your 35 years, you have obviously learned a lot. What mistakes have you learned from, and how did you change your approach to homebuilding at Meritage over the three-plus decades you were running the company?

Hilton: Years ago, we thought we could do everything. We found we weren’t super good at any one thing. We built homes for every type of buyer, at every stratum in the market. We eventually shifted our strategy to focus on the entry level and first-time move-up, and it has turned out to be a great decision. Those segments of the market needed more innovation, and that is where the company is now focused. Know what you do and who you are and be the best at it.

Hunter: Great! So, sum up for us in a few words what you see going on in homebuilding right now.

Hilton: It’s the perfect storm, with three things converging. Number one, our strategy of simplification. Easy equals right. Number two, the pandemic is pushing people even faster to the suburbs. Number three, low mortgage rates, under 3%, are driving phenomenal value for buyers. As a result, sales are up 40%-50% from 12 months ago. This isn’t a pull-forward of demand, but the creation of additional buyers who didn’t anticipate being able to be homeowners at this point in their life.

Hunter: Thank you for your insights, Steve.