Hats off to the CEO of Hovnanian (NYSE: HOV). As my Foolish friend Seth Jayson has told you, for three days last week, the company that bears Ara Hovnanian's name chopped prices on some of its homes by as much as $100,000 apiece, in an effort to jump-start moribund sales.
I suppose I'm surprised that others haven't taken the approach, although Seth thinks they will. After all, builders have been taking huge hits by writing off land and land options for several quarters. And prices have clearly been drifting lower in soft markets at builders such as Beazer (NYSE: BZH), Centex (NYSE: CTX), Lennar (NYSE: LEN), and D.R. Horton (NYSE: DHI). But if any other builder has gotten as draconian as Hovnanian, it's done so very quietly.
Indeed, Hovnanian's results apparently exceeded its expectations, garnering sales of more than 2,100 homes. The question now becomes, with cancellation rates still at about a third of new contracts at many builders, how many of the weekend's sales will stick?
Hovnanian's sale-a-thon preceded the news from the National Association of Home Builders that its builders' confidence index fell in September to 20, its lowest level since 1991. Anything less than 50 for the index signals that the homebuilders are less then cheery.
Next, the Commerce Department told us that August housing starts had fallen to a seasonally adjusted rate of 1.331 million, a 19.1% drop from a year ago. At the same time, single-family permits, another widely followed measure of builders' confidence, slid 27.9% year over year.
It obviously remains to be seen the extent to which the Federal Reserve's Tuesday's half-point cut in the federal funds rate will benefit housing. My feeling is that the rate cut will clearly salve the mortgage industry somewhat, but likely nowhere near enough for a quick turnaround.
On that basis, I draw two conclusions from Hovnanian's blowout: First, the approach seems to make sense for all builders looking to cut fat inventories. If they're going to cut land ruthlessly -- and appropriately -- it's ludicrous to maintain bloated inventories of unsold homes. It's clearly better to pare all parts of the business amid the current conditions than to chug along hoping for an overnight miracle.
At the same time, as I've told Fools in the past, I think we should wait until we see ear-to-ear smiles on the faces of the folks at mortgage lenders such as Countrywide (NYSE: CFC) and Washington Mutual (NYSE: WM) before we place any buy orders on the builders.
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