Hovanian Enterprises, Inc. (NYSE: HOV) is a home builder and financial services provider based in the US. The company makes money by designing, constructing, marketing, and selling single-family detached homes, attached town homes and condominiums, urban infill, and active adult homes. By appealing to first-time buyers, second-time move-up buyers, luxury buyers, active adult buyers, and empty nesters, the company offers homes in 284 different communities in 44 markets and 18 states across the country.The secondary real estate market will continue to create a lag factor for the home building industry as demand is first sopped up by secondary real estate.
HOV posted revenues of $1,371.8 million for FY2010, a 14% drop in revenues compared to FY2009. This drop is consistent with the decreases in revenue and gross margins all throughout 2007, 2008 and 2009 in the economic downturn. Key to business growth for HOV include its gross margin, cancellation rates and total deliveries. Although the company continued to see declines in deliveries and revenues in FY2010, the company's cancellation rates of 23% to 24% in the later quarter of FY2010 seem to be more consistent to normalized levels, similar to those seen in FY2003 and 2004. As the market for new homes continue to decline, the company has changed its business strategy to land acquisition and construction practices. It has also shortened its land pipeline, reduced production volumes, and balanced home price and profitability with sales pace. By making the company leaner and acquiring assets at cheap prices, HOV hopes to gain the upside when the economy finally recovers.
Because HOV operates in the new housing development business, the price which it may set its final sale price is highly dependent upon existing houses in the market. In particular, this existing housing demand comes about two-fold; one from resale of current homes and a second from the rental sphere. Traditionally, with high lending requirements, households are forced to rent if they cannot afford to secure adequate lending without putting down a sizable down-payment. Further with a high inventory of existing homes for sale, the housing market typically soaks up those homes before builders such as HOV may come into the playing sphere. These factors ultimately put downward pressure on its revenues.
Several signals of a housing industry bottom have already become apparent. Recession has dealt a severe blow to the home-building sector and new construction is far below the rate needed for normal population growth and replacement of older homes. Job losses appear to be moderating, consumer spending is up, if only slightly, and manufacturing and other industrial data have provided encouragement. The massive drop in prices, federal incentives for buyers and relatively low borrowing are making housing more affordable. According to Department of Commerce, sales of new homes rose by the fastest pace in over four years to a seasonally adjusted annual rate of 433,000 units, well above the 390,000 rate economists were expecting. New home sales were up 32% in Northeast where Hovnanian has considerable exposure.
As housing prices have considerably sunk in all major US cities since 2006 levels, homebuilders have gone on a rampant spending spree to acquire cheap assets. As a diversified home builder, HOV is competing with a wide array of other large homebuilders such as: