Hovnanian Enterprises, Inc. Earnings: Is the Housing Boom Ending?

On Wednesday, Hovnanian Enterprises (HOV 2.46%) will release its quarterly report, and shareholders aren't at all certain what to expect from the homebuilder. Even as home prices have been on the rise, affordability has once again become a concern among industry trackers, and mixed results from rivals D.R. Horton (DHI 1.20%) and PulteGroup (PHM 2.37%) make it unclear whether Hovnanian will deliver the strong earnings growth investors expect.

Two years ago, the homebuilding industry enjoyed a huge run-up, as investors celebrated the success of Hovnanian, PulteGroup, D.R. Horton, and their peers in surviving the worst of the financial crisis and setting the stage for a more lucrative future. But as the housing market has recovered, market analysts have grown nervous about the influx of cash buyers and their potential impact on the long-term viability of housing and the current recovery, and that's part of what has hit Hovnanian stock lately. Let's take an early look at what's been happening with Hovnanian over the past quarter and what we're likely to see in its report.

Stats on Hovnanian

Source: Yahoo! Finance.

Can Hovnanian earnings build higher?
In recent months, analysts have cut their views on Hovnanian earnings, reducing April-quarter estimates by more than half and making cuts of 25% to 40% for the full 2014 and 2015 fiscal years. The stock has gone through a rough patch, plunging 24% since late February.

Most of the share-price declines Hovnanian suffered came after its fiscal-first-quarter earnings report in March. Revenue gains were limited to just 1.6%, and a huge uptick in overhead expenses of about 20% led to per-share losses that more than doubled the previous year's shortfall. CEO Ara Hovnanian pointed to traditional seasonal weakness for housing during the winter months, but with the number of contracts in February not meeting company expectations, Hovnanian likely continued to face tough times in March and early April as spring was so slow in coming. Falling delivery numbers also didn't help Hovnanian's bottom line.

Some of the trouble that Hovnanian, PulteGroup, and D.R. Horton are dealing with stems from concerns about what many fear could be a new housing bubble starting to form. Although many states throughout the country still have home prices well below their mid-2000s peaks, an increasing number of states have indeed gotten back to and even surpassed their former high-water marks. Even though recent drops in interest rates have prolonged the availability of cheap mortgage financing, Hovnanian could still have trouble if soaring prices make affordability a major problem for would-be homebuyers. With mortgage originations hitting their lowest level in 14 years during the first part of 2014, financing woes could indeed hurt Hovnanian and its peers. That hasn't stopped investors from making all-cash deals for homes, but that activity can't sustain the entire market in the long run.

Another trend that's emerging in homebuilding is that companies are working hard to offer homes for every type of prospective buyer. PulteGroup has done a particularly good job on that score, with strategic acquisitions like Del Webb and Centex helping it build brand loyalty in different market segments. Hovnanian hasn't moved quite as aggressively on those fronts, but it will want to do so in order to protect its market share in certain key markets.

In the Hovnanian earnings report, watch to see how the homebuilder's latest figures compare to those of PulteGroup and D.R. Horton. With rising competition in many areas of the country, Hovnanian needs to hold its own in order to emerge victorious in the long run. Otherwise, as conditions in housing cool off from rising interest rates, Hovnanian could see serious headwinds for its business.

Click here to add Hovnanian to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.