"$150,000 in Regulatory Fees per Lot Before Breaking Ground"—The Real Cause of Rising US Housing Prices and Why Meritage Homes Is a Buy Now
As war risks with Iran and interest rate trends shake the market, the structural problems of the US housing market are once again in the spotlight. In Steve Eisman's "The Weekly Wrap," an interview was released with Philippe Lord, CEO of Meritage Homes (NYSE: MTH), the fifth-largest homebuilder in the US.
We break down the real reasons why housing prices are not falling, the investment opportunity in Meritage, and the structural changes in the industry.
1. Current State of the Housing Market—The "Three-Legged Stool" Is Collapsing
1-1. The Structure That Has Supported New Home Demand
Lord explained the housing market using three elements: jobs, housing costs, and consumer confidence. Since 2020, only the new home market has remained robust due to low interest rates and the lock-in effect of existing homeowners (who cannot afford to let go of homes purchased at low rates).
However, the situation has changed since the second half of 2024. Consumer confidence has fallen to historic lows, and the labor market has begun to soften in some areas. This is impacting the low-to-middle-income demographic that makes up Meritage's primary customer base.
1-2. Mortgage Buydowns as a Price Adjustment Tool
An important industry practice Lord explained is the "mortgage buydown." Homebuilders can offer customers interest rates lower than the market rate through their own mortgage subsidiaries. For example, if the market rate is 6.5%, the builder covers the cost to offer a 5.5% rate. While this has been the source of competitiveness for the new home market, it is also a structure where costs balloon as interest rates remain high.
2. The Real Reason Housing Is Expensive—The "Invisible Wall" of Local Regulations
2-1. Three Cost Factors
Lord cited three main factors for rising housing costs. Labor shortages (the most minor), rising costs for building materials and supply chains (moderate), and local regulatory fees related to land (the largest).
2-2. $150,000 Before Breaking Ground in California
The most shocking specific example is California.
"In California, excluding any land purchase or development costs, we pay $100,000 to $150,000 in regulatory fees per lot just to get the right to break ground. Building permits, impact fees, school fees, transportation fees—every conceivable type of fee adds up to this figure," Lord said.
If you try to develop a 50-lot plot of land, you are looking at paying $5 million to $7.5 million to local government before even starting on the buildings. Naturally, this cost is passed on to the price of the home.
2-3. No Incentive for Local Governments to Improve
The structural problem Lord pointed out is profound.
"Local regulatory authorities have no incentive to bring land to market cheaply. In fact, the higher the housing prices, the more the asset value of existing homeowners (i.e., voters) is maintained. That is why the problem has continued to worsen."
Even if the federal government tries to solve it, the authority lies with local municipalities. While the Trump administration is also attempting to address it, the reality is that no solution is in sight.
2-4. The Texas Model as an Exception
In contrast, Texas has a functioning system where homebuilders can utilize low-cost municipal bonds to fund infrastructure at a lower cost in exchange for providing affordable housing. Lord cited this as a "model that the federal government should refer to."
3. Investment Opportunity: Meritage Homes
3-1. Company Overview—The 5th Largest Homebuilder in the US
Meritage is a homebuilder that constructs approximately 15,000 homes annually, operating primarily in the southern United States, including California, Arizona, Texas, Florida, and Georgia. The average selling price across the company is about $400,000, targeting the affordable price range eligible for FHA (Fannie Mae/Freddie Mac) financing.
3-2. Why It Is Undervalued Now
Meritage is currently trading at 0.95 times its tangible book value. Historically, investors who have purchased homebuilders at this level have seen long-term gains.
Eisman states, "Historically, if you buy homebuilders below tangible book value and hold them patiently, you have made money. Meritage's tangible book value is about $74–$75, and the stock price is in the $68 range."
3-3. Path to ROE Improvement
Current ROE is below 10%, but it has achieved 12–17% in the past. The key to improvement is "increasing the land option ratio."
Currently, Meritage has a composition of approximately 70% owned land and 30% optioned land, which is a higher self-ownership ratio than the industry average (around 50%). Major players like Lennar (LEN) and D.R. Horton (DHI) have optioned 70–90% of their land, resulting in higher capital efficiency.
Meritage announced in an earnings call that it will transition to "40–50% optioning." Improving capital efficiency will lead to higher ROE and could result in an increase in valuation multiples (currently 0.95x, with a target of 1.5x or higher).
3-4. The Tailwind of Share Buybacks
The CEO has indicated a policy to conduct share buybacks equivalent to approximately 10% of outstanding shares through 2026. Share buybacks below tangible book value have the effect of directly increasing book value per share.
4. Risk Factors—What Are the Headwinds?
The biggest risk is interest rates. At the time of Eisman's recommendation in January, the 10-year Treasury yield was in the low 4% range, but it has risen to 4.4% due to the impact of the war in Iran. If mortgage rates rise, demand will slow, and Meritage's mortgage buydown costs will also increase.
Low consumer confidence and a softening labor market also remain as short-term headwinds.
Summary
The answer provided by CEO Philippe Lord's interview to the question "Why are US homes expensive?" is clear—the primary cause is not interest rates or construction costs, but the duplication of local regulations and vested interests. This structure is not a problem that can be solved in the short term.
On the other hand, as an investment opportunity, Meritage has multiple catalysts: a 0.95x tangible book ratio, share buybacks, and an improving option ratio. It is a stock that could see a revaluation when interest rates stabilize. This article is for informational purposes only and is not an investment recommendation. Please make investment decisions at your own risk.
