Hovnanian's Losing Streak Continues

Hovnanian Enterprises (NYSE: HOV) did little more than confirm the pathetic state of housing in the U.S. and its potentially lethal effects on homebuilders when it released third-quarter results Thursday. And while those results included the company's fourth consecutive quarterly loss, the real key is that management appears not to see even a faint light at the end of its tunnel.

For the quarter, the company's loss after preferred dividends came to $80.5 million, or $1.27 a share, compared with earnings of $74.4 million, or $1.15 a share. The 3,179 homes delivered (unit sales become less important when the cancellation rate is at 35%) didn't look as good as the 4,623 homes delivered last year. The quarter was noticeably affected by land impairment and write-off charges of $108.6 million.

In talking about the quarter, CEO Ara Hovnanian pointed to the role of credit tightening in the mortgage market in reducing the number of qualified homebuyers. He also noted that existing home inventories "remain persistently high in many of our markets."

But easily his most salient comment for those looking for a quick fix to housing's worsening maladies was this: "Since the end of our third quarter, the tightening of lending standards ... has extended beyond the subprime market and is now impacting jumbo mortgages and further tightening of Alt-A loan underwriting standards." Translation: Things will probably get worse before they get better.

Hovnanian's woes are, of course, similar to those of other builders. Toll Brothers (NYSE: TOL), which, like Hovnanian, frequently has its name proceeded by "luxury builder" in news articles, recently reported an 85% drop in its quarterly profit. Other builders, including Centex (NYSE: CTX), Meritage (NYSE: MTH), and Beazer (NYSE: BZH), have even avoided forecasting earnings ranges in the face of housing's slide.

Hovnanian will try to deal with its circumstances by slashing prices on its homes across the country beginning late next week. It's a novel idea -- one that other builders are also adopting, and one that just might find its way into the ranks of those attempting to unload pre-owned homes. It's also an approach that works: My wife and I recently placed a "buyer's price" on our home amid Florida's disastrous market. It sold the day it was listed, but the accompanying equity hit can be a tough pill for some sellers to swallow.

From an investment perspective, I'm convinced that we should be seeing smiles on the faces of staffers at mortgage lenders such as Countrywide (NYSE: CFC) before buying shares in the builders. But I continue to believe that those smiles are a long way off. Only time will tell.

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