No Summer of Love

Posted by: Chris Palmeri on June 13, 2007

Hovnanian Enterprises, a big national homebuilder headquartered in New Jersey, reported disppointing results yesterday for its second quarter. Sales, at $1.1 billion, came in $100 million less than what Wall Street was expecting and 29% below the same period last year. Cash flow fell 80% to $40 million. Contracts for new homes slid 24%. Management again lowered its sales estimate for the year. The forecast, joked Gimmie Credit analyst Vicki Bryan, calls for “six more weeks of winter for homebuilders and no summer of love.”

Homebuilders woes are many, including an oversuppy of new homes, rising interest rates and tougher terms on new mortgages so fewer buyers qualify. Add a new one, a slew of lawsuits claiming builders forced buyers into taking out loans they couldn’t afford through their captive mortgage brokerage arms.

What’s interesting about Hovnanian’s strategy is that the company continues to hold prices fairly steady. Its average price per home was $347,000 for the quarter, 3.5% higher than at year-end. The company clearly would prefer to lose sales than lower overall prices. That’s a bit of good news for home owners in market’s where Hovnanian competes.

Reader Comments

rich

June 13, 2007 9:58 PM

Chris,

Some young writers today espouse ideas that sound plausible on the surface but are just nonsense, if you stop and think about it. One such idea is yours -- that "Hovanian" is doing home owners in its markets a favor by not lowering prices.

First, try spelling the name of the company right.

Hovnanian is not doing any local homeowners a favor as long as it keeps building, regardless at what price it is selling. Even if you have a home for sale in a Hovnanian market right now, and are desperate to sell, Hovnanian is not doing you a favor. The market is determined by supply-demand. Not building more homes or holding newly built homes off the market affects supply/demand. The asking price of homes on the market has no effect on supply/demand. In practice, asking prices above true market just dry up sales. Of course, affordability factors, interest rates and credit availability directly affect supply/demand. When Hovnanian holds out for higher prices, they affect none of these critical factors one way or another. It has the same effect as holding your breath a long time.

The big problem, Chris, must escape you. It is the fact that so many REOs and foreclosures are coming onto the market while Hovnanian and other builders are desperately trying to unload projects to save their balance sheets and dwindling cash. It has created a supply tsunami that just overwhelms a local market's demand. The supply/demand imbalance will only get better when building slows way, way down and/or prices come way, way down.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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