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TWST: Bob, will you set the stage for us by telling us about the size and strength of the homebuilding industry today?

Mr. Curran: This has been a long, robust housing cycle. It began in the early 1990s. A key measure of housing activity is housing starts. Total starts were 1.01 million in 1991 and then advanced or held steady every year since, except in 1995 when starts declined 7%. Total starts apparently peaked at 1.67 million in 1999. Single-family starts troughed in 1991 at 840,000 and ultimately reached 1.34 million last year. I anticipate moderate weakness in starts this year with the total declining 3.9% to 1.60 million and single-family starts decreasing 3.3% to 1.29 million. Total volume could drop a further 1.3% in 2001, with single-family off less than 1%. Nevertheless, whether by the current cycle’s standards or by broader historical measures, the absolute housing levels this year and next are expected to be quite robust. Many building-related companies have consistently benefited from the strength of this cycle — homebuilders, materials and components producers, and distributors — and they are still prospering today. That’s particularly the case for the larger public homebuilders. Those large builders, which I focus on, will all report double-digit increases in their homebuilding profits in the current fiscal year despite spectacular gains last year. As a group they should also report at least a high single-digit increase in earnings next year as well. Although there are a variety of factors that influenced housing demand and supply this cycle, I would single out a consistently growing economy, steadily rising employment and low mortgage rates, especially by historical standards. Mortgage rates at present are below 8% and off approximately 70 basis points from their high earlier this year. So at present affordability is reasonably good, despite some fairly substantial home price appreciation, especially in recent years.

TWST: Bob, what approach would you have investors take? Which stocks do you like best?

Mr. Curran: Much of the time the stocks do trade as a group, although the gains and declines aren’t generally uniform. At times, unsustainable multiple imbalances among companies occur. That presents opportunities for investors. Some institutional investors have a problem investing in homebuilding. You don’t have large capitalization companies. So it isn’t always practical to make a sizable investment in just one stock. The approach usually taken is to invest in a market basket of three to four of these mid- and small capitalization stocks. I am recommending all of the homebuilders that I follow. My highest rated stock is Kaufman & Broad Home Corp (NYSE:KBH). A major reason for this is the company’s continuous heavy exposure to California and France, which are in earlier stages of their cyclical expansions than the rest of the United States. Although California isn’t as significant to Kaufman & Broad as it was five years ago, it still is quite meaningful. As I said earlier, California should be the best big-state market in 2001 and beyond. The company is also a big player in major metropolitan markets in Texas, which is currently the strongest big-state market in the country. Kaufman & Broad has done an excellent job over the last 10 years in building a significant presence within a variety of non-California western markets. Today’s announcement that KBH would be buying 4 million shares of its stock, owned by the Lewis family and a former senior executive officer of Lewis Homes, is another positive development. This appears to be a very accretive action.