More Heartache for Hovnanian

The homebuilder expects to report losses for the second quarter as demand dries up and land values slump

Hovnanian Enterprises HOV said May 4 that it expects to report disappointing financial results for the April quarter, after the homebuilder lost money on its land in a market that has been going from bad to worse. The Red Bank (N.J.) is suffering along with other industry players amid an entrenched housing slump and tigher credit for would-be homebuyers.

Homebuilders have been getting crushed during recent months as the housing market slows, denting the value of the inventory that they had gobbled up during earlier boom times. Now Hovnanian says it will suffer between $15 million and $20 million of pretax losses related to land during the second quarter. Including such misfortunes, the company lost between 45 cents and 50 cents per share during the second quarter ended Apr. 30. Excluding them, Hovnanian expects to report a loss of around 30 cents per share, below its prior forecast for a loss between 5 cents and 20 cents per share.

As foreclosure rates rise, the mortgage market has been barraged with bad news from companies that lend to people with poor credit. Hovnanian noted "a continued challenging operating environment" in most of its markets, "exacerbated by recent problems in the sub-prime mortgage market. The adverse publicity surrounding the sub-prime market has further damaged home buyers' psychology, resulting in decreased demand and leading to continued use of sales incentives," the company said in a statement May 4.

The numbers are disheartening. Excluding 202 net contracts for unconsolidated joint ventures, Hovnanian had a net 3,116 building contracts during the Apr. quarter, down 21% compared to the same period last year. Cancellations amounted to 32% of gross contracts, down from 36% reported in the first quarter of 2007.

After the news investors sold Hovnanian's stock 4.1% to $23.57 per share in afternoon trading on the New York Stock Exchange, not far above its 52-week low of $22.61 in April.

"Tightening credit conditions are hurting an already soft market," Standard & Poor's equity analyst Thomas W. Smith said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.)

Hovnanian isn't the only homebuilder feeling the heat. Beazer Homes USA (BZH) on Apr. 26 announced a loss during the three months ended March, while its rival Pulte Homes (PHM) came out with news the previous day of a profit that was down 67% compared to the same period last year. Meanwhile, the largest homebuilder in the U.S., D.R. Horton, Inc. DHI said Apr. 19 that its earnings fell 85% (see, 4/19/07, "Homebuilders: The Chill Lingers").

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