Hovnanian Enterprises (NYSE:HOV) will release its quarterly report on Monday, and growing pessimism about the prospects for the homebuilder has helped pull shares back down to earth after a big run-up. For now, Hovnanian earnings look like they'll still reflect the company's profitability, but in the long run, it's more questionable whether the homebuilder will sustain its turnaround.

Hovnanian was one of the biggest beneficiaries of the rebirth of activity in the housing industry last year, as its stock more than quadrupled in 2012. Since then, though, shares have fallen back as rising interest rates have started to weigh on home affordability. Will the end of Fed policies to bolster home-buying activity kill Hovnanian's future prospects? 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

Analyst EPS Estimate

$0.07

Change From Year-Ago EPS

(72%)

Revenue Estimate

$504.7 million

Change From Year-Ago Revenue

30%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

How far will Hovnanian earnings fall this quarter?
Analysts have actually been somewhat more optimistic in recent months about Hovnanian earnings, adding $0.01 per share to their July quarter calls, and $0.05 per share to full fiscal-year estimates. The stock, though, has continued its 2013 swoon, falling another 16% since early June.

Hovnanian started the quarter off well, reporting earnings that included an 18% increase in deliveries of new homes. A 24% jump in revenue resulted in positive net income for Hovnanian, defying expectations for a modest loss, and dollar volume of contract backlogs climbed by 34% from year-ago levels.

As well as Hovnanian has done lately, however, its recovery hasn't led to anything close to the activity it experienced before the financial crisis. Even though Hovnanian's quarterly home sales have risen significantly since the low levels of 2009 to 2011, they remain at roughly a third to a half of levels seen during the peak boom years of 2005 and 2006. That's fairly consistent with what we've seen from many other homebuilders, with KB Home having seen relatively little recovery in home sales, while Lennar has bounced back in similar fashion to Hovnanian.

Moreover, some areas are still working through the fallout from the financial crisis. A recent jump in foreclosures reflects the fact that some jurisdictions have extended processes for foreclosing on homes, meaning that it's taken longer to get homes through the system and back onto the market.

Yet, the bigger threat comes from higher mortgage rates, which have helped push affordability to its weakest level in more than four years. That's particularly bad news for Hovnaian and MDC Holdings, which cater to first-time buyers who are most likely to get priced out of markets when mortgages are harder to get. Still, some evidence suggests that the need for banks to sustain mortgage-related profits will lead to easier lending standards going forward, especially as refinancing activity has essentially dried up.

Still, Hovnanian is optimistic. CEO Ara Hovnanian noted recently that, "We are still far below the average production for the decade" in terms of housing starts, and that bodes well for the long run.

In the Hovnanian earnings report, watch to see if higher rates have had any detectable impact on its performance. If sales don't take a step backward, then it's entirely possible that Hovnanian could survive a higher-rate environment mostly intact.

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