Meet the Mega-Watt
Editor's Note: Pioneering builder Raymond Watt passed away July 7 in Rancho Mirage at the age of 90. Watt had been interviewed for a story that appeared in the September 2006 issue of California Builder. Some of his insights then remain relevant today. For that reason, we are re-running the story.
Interview by Sarah Langford
As president of Santa Monica-based Watt Companies, Raymond Watt, 87, has been building in California for 60 years. In that time, he has overseen the construction of more than 100,000 homes and apartments, 8 million square feet of office and industrial space, 50 shopping centers, and three major hotels. Besides demonstrating an ongoing commitment to community and civic service, Watt has been a major player on the political scene, helping to shape several laws that govern the building industry today. He is a Past President of the BIA of Southern California and a 1987 California Building Industry Hall of Fame honoree.
CB: How is homebuilding different than when you first started 60 years ago?
RW: When I started in the business in 1946 with my couple of brothers, the first thing we did was build a mobile home park. In 1947 we started doing remodeling and building custom homes and commercial buildings and just responding to the need. You have to understand that in 1947 after the War, materials were short and money was extremely difficult to come by. So certainly in the early 1950s, a builder would spend as much as 50 percent of his time arranging financing and only about 5 percent of his time looking for deals. Today, it’s totally different; you spend 5 percent of your time arranging financing, with people knocking on your door all of the time wanting to finance your projects, and you spend 50 percent of your time identifying and pursuing projects. I would say that’s the major difference.
CB: What industry achievements are you most proud of?
RW: I was one of the sponsors of the condominium program… Before condominiums, we had co-ops. The problem with co-ops was that you had one loan on the entire building. If you had 50 units in it, every individual that bought a unit was liable for the taxes and the mortgage payment on the entire building. (Conversely,) a condo provided separate ownership of each unit. The separate owners were responsible only for their own mortgage and their own taxes. The lender or county tax assessor couldn’t foreclose on anything more than that one unit.
I was one of the sponsors that got a senator to introduce the condominium legislation initially. Even though the Governor indicated he’d sign, in the rush of things, it didn’t get signed and so it didn’t become law. This was a problem for us because we had two projects underway. Of course, it was 1959 and a few made fun of the whole concept of condos. But I initiated a program and put on a seminar at the Hollywood Palladium, and about 2,000 people attended. So I just stayed at it and eventually legislation was passed permitting condominium ownership and lenders were willing to provide financing for it.
CB: What has been the most difficult challenge of your career, and how did you overcome it?
RW: One constant, ongoing challenge is the business cycle. Every three to five years, we have a situation where the industry is overbuilt and values are discounted (in order) for builders to continue to be in business. If I had to identify one specific challenge however, it would relate to the restrictions on financing the sales of our homes.
You see, up until the early 1970s, the industry was pretty much led by HUD, and they established values through FHA and VA. So if they gave you a sales price you could sell a home for, you couldn’t sell it for more than that and have them finance the loan. To make sure that we were in compliance, (FHA) would come and review our books three times a year. During the War you had price control and limited profits so HUD’s financing constraints kind of carried over in the mentality of the government, and it wasn’t until the ’70s that that whole system was eliminated. Values were all created by replacement costs, whereas today it’s done by market.
Because California was a high-cost area – it cost more to build a house in California than it did in Nebraska or someplace – we constantly had to convince the senators in Washington D.C. to recognize our cause and take into consideration that what might have been fair somewhere else wasn’t necessarily fair in the California market.
CB: What are some of the major issues and challenges that homebuilders will face in the next decade?
RW: I believe the biggest challenge is trying to control bureaucracy and the tendency bureaucracy has to want to over control, over manage. When we first went into business, we would have a subdivision underway in 90 days. Today, it will take from two to five years, depending on the location.
When you talk to the individuals we sell to, they are just waiting in line to buy and they don’t understand why we aren’t building enough affordable product. Try to explain to them that we are trying to prove to the (U.S. Army) Corps of Engineers or (California Department of) Fish and Game that there is a little bug we’re trying to protect – it’s so aggravating.
I really think it’s getting worse instead of better. It runs up the costs of housing. It’s a shame because a house is so important to the values and lifestyle of a family, and to building character in children in a home (their parents) own.
CB: You’ve been battling this for years. How do you combat it?
RW: When I was president of the (Southern California) homebuilders association in 1963, we saw this bureaucracy growing and I set up a committee which met with members of the board of supervisors of L.A. County – a good group of people who were pro-growth and balanced. When we told them how disorganized the county was and how much overlap there was, they said, ‘Ray, what would you suggest?’ I said, ‘Well, would you let us hire a firm of your choosing that would actually prepare a schedule and show the critical path needed to take a project through the county, and show that we can work together and eliminate four or five months of this overlap?’ And they discussed it and said ‘yes,’ and we met with senior county officials for about five months with a consultant…and the department heads accepted it to use as a guideline of what they expected their people to do.
For four or five years it really made a difference, but as different members of the board were replaced and different people headed up departments, it got away. At the present time we have a couple people on the board of supervisors going in one direction while the homebuilding business is going in another direction. I think what we do is hire more consultants and we spend more money processing and accept the system or we fight it.
It’s like California itself: What can the Governor really do? We have so many factors in Sacramento. I always thought that we’d reach a peak where there’d be a limit to how much people could pay for houses, and it would just shut off. I couldn’t believe when we hit average sales prices of $200,000. I thought, ‘Yeah it’s gonna be over.’ Last year we did more than 3,000 houses and the average was about $480,000. Doesn’t that kind of scare you? How long can it go?
CB: Do you feel that today’s buyers have changed much from when you started?
RW: When we started, many people were returning from the Second World War and were getting married and wanted a home. They had the willingness to go out and pioneer and accept less than what buyers want today, so they were part of a different generation.
You have to understand that people didn’t have a garbage disposal let alone a dishwasher; they weren’t invented until after the War. I think that today, people want more space, they just didn’t have the income back then that they have today.
CB: Do you think 20 years from now the industry will still be producing mostly single-family?
RW: We’ve been able to develop a product that gets us 12 units to the acre where they are permitted in clusters, and they are detached and very popular and they are reasonably priced. But as land and other prices keep going up, our costs keep going up, so now we just have to go to more dense projects that are attached housing. There again, (we’re trying) to keep the price down to qualify more buyers. But attached housing is going to be more predominate because we can build them cheaper.
You can’t image what has happened to the cost of land. In 1950, we bought land for $3,000 an acre in Torrance and sold the houses for $9,000. Today, we pay $2 million an acre for that land and sell the houses for $400,000, and they are not much different: 1,000-plus square feet, bathroom-and-a-half, living room, dining room, and two-car garage. Some people think well, builders just run up the price – but that’s not at all accurate. Builders want to keep prices as low as they can to be able to sell the product. It’s true that we’ve been able to make more profits, but that was last year. It isn’t this year.
CB: Do you think there’s going to be a significant shift in the market coming up?
RW: There’s no question that we aren’t going to make as many sales and we’re not going to build as many houses. (But) I don’t see values going down like they have in the past.
Things that have caused real sharp changes in the past – like the aircraft industry’s overnight layoff of thousands of people, with people leaving the state, just walking out – are different this time. There are too many people ready to take on that mortgage now. We’ve had too many years where the need was 100,000 units and we could only get 50,000 permits, and so there continues to be a pent-up demand.
CB: You’ve chosen to remain private rather than public. What’s the future of privately held homebuilders in the next 20 years?
RW: We’ve been public a couple times and I don’t believe that the real estate industry fits publicly held companies’ required image, and that is to show earnings every quarter. To do that in the past, we’d sell valuable land for, let’s say, 60 percent of its worth and earn a mega-profit, but it just eliminated making more money the following year.
The pressure from Wall Street is so severe in earnings. They believe a well-managed company gets earnings every quarter, and that’s what they’re looking for. There are too many outside factors that control real estate and the homebuilding industry and frankly, we’ve had opportunities to sell the company I’d say 10 times in the last two years, and I have no desire at all to become public.
CB: Can a relatively small homebuilder aspire to become a large and successful company in the current economy?
RW: I think they can, (but) they can’t do it without having worked for a small company for probably eight or 10 years to really understand and be involved with that company and all the facets of the business. I’m talking about buying land, developing it, processing it, building the project, financing, merchandizing the houses, and selling them. These are all parts of the industry that you have to understand and master in order to be successful.
CB: You’ve been building homes in California for nearly 60 years. What does it mean to you to be a California builder? Do you take special pride in that?
RW: Of course there’s tremendous pride in building in California. It’s where I started and it is the center of our operations. Having said that, we’ve built in a lot of other states too. We’re building in Hawaii now. We’ve built there for years. We’ve found that there’s an awful lot of time wasted in travel, and modern builders – they can afford more superstructure. In the early ’60s when we were building and crossing the country, we were on the road four days a week. We didn’t have the staff that builders have today.
CB: Can you talk a little bit about your public service involvement?
RW: You know, I had kind of a little personal hang-up, thinking that I have been so fortunate that I have to give something back. At PCBC, I was the program director for five years. I served on the earthquake commission after the earthquake in ’72 and the Home Loan Bank, Boy Scouts, everything – these are things that I really believe in and can make contributions to, and that’s something that I enjoy doing or have enjoyed doing.
As you get a little older, you recognize that you have to let the young people take over and that it’s their day and their era. I’ve been very fortunate with my son – he’s been in the business since he was 12 years old. So now I tell people that I am a counsel and he runs it and I no longer worry about it.
CB: What has it meant to you to be involved in the BIA and CBIA?
RW: I just smile when I think about how much I learned (in the HBA) and how much I would apply it to my own business. And, of course, later on I found that I enjoyed telling others about it, so it was a great form of networking and developing relationships with people and making friends for life.
CB: What about the governmental affairs side of things? Has being involved been beneficial to you?
RW: Oh yes, very much so, especially if you take the time to get involved. Unless you spend the time and get that confidence, you can’t just go up there (to Sacramento) once or twice a year and expect results. You’ve got to pursue it.
CB: Do you have any advice for builders to protect against the slower times?
RW: Of course, I was always a believer in putting the profits in depreciable assets where we could – that’s how we developed 10 million square feet of commercial and industrial and apartments. Then when we hit a bad cycle, we could borrow money to see our way through.
It’s my observation that if you buy land regardless of what you pay for it, as long as you can hold onto it in a down cycle and retain the ownership, it’ll come back. That’s what really hits the hardest in a downside, when you get rid of the unsold houses that you’ve built and land that you own just to keep the organization afloat. The thing is, if you can find any way to do it, retain that land. That’s your future.