The latest housing market data might remind you of one of those haunted-house tours you take around Halloween -- there's lots of scary stuff packed in there. Pending home sales are down 12.2%. Real estate agents, usually an optimistic group, expect new-home sales to fall 23.8% this year and 7.4% in 2008. After a tremendous run-up, home prices are crashing down, and the woes in the subprime loan sector are only making the situation worse. Now even jumbo loans, which aren't eligible for federal guarantees, are facing difficulty.
It's with this in mind that we embark on a tour of Hovnanian Enterprises
The fright-fest begins
As my Foolish colleague David Lee Smith points out, red seemed to be the color du jour for Hovnanian's latest quarter. The company lost $1.27 a share, for its fourth straight quarter of red ink, while revenues fell 27.1%, to $1.1 billion. And things don't look to be getting better anytime soon.
Management itself has said that tighter lending standards have extended beyond the subprime market, to now include jumbo loans, which, because they exceed federal loan limits, aren't eligible for guarantees from the federal government or through government-sponsored enterprises such as Fannie Mae
And then it all comes back to add to Hovnanian's woes. As of July 31, Hovnanian's contract backlog stood at 7,126 homes with a sales value of $2.5 billion. This is down more than 31% from a year ago. Of course, it's somewhat subjective just how much "backlog" really means in this market. One thing to consider is that the cancellation rate was 35% in the latest quarter. Similarly, the sales value could be less than $2.5 billion. But either way, to deal with the higher inventory -- builders' parlance for too many houses and not enough buyers -- Hovnanian will lower prices across the board. The gross margin, which declined by a whopping 750 basis points to 15.9%, will continue falling as a consequence. But then again, I suppose it's better than being stuck with a bunch of empty homes.
Write-offs -- when will the madness stop?
Hovnanian continued to write down land and inventory -- more than $108 million worth in the latest quarter alone. Basically, this means that the land and houses Hovnanian owns are no longer worth what it paid. This is a legitimate business expense and should not be ignored.
At quarter's end, the company had 46,747 lots controlled under option contracts and an additional 32,576 lots owned. That's is a 31% drop from a year ago. The company does have the flexibility to walk away from some of its land options. Will doing so slow down the charges? I don't know, but given the declining values and a tough mortgage market, I wouldn't rule out further write-offs down the pike.
A tour of some other scary sites
At least Hovnanian is better off than Beazer Homes
Buyer's remorse, or investor's opportunity?
Given the problems with mortgages and the slacking demand for houses, now is not the time to invest in Hovnanian. Although it is committed to using its cash flow to reduce debt, that debt still stands at a hefty $2.5 billion -- up from $2 billion, largely as a result of tapping into its revolving-credit facility with the banks with which it does business. The company has also had negative cash flow from operations, which might help explain the necessity for cash. A drawback to dealing in land and building inventories is that nobody really knows what they are worth.
For those worried about missing the upturn, just sit back and relax. You'll know before the housing stats give you a signal. Just drive around your neighborhood, count the "For Sale" signs, and see how long they stick around. Last I checked, there were still plenty by me.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at firstname.lastname@example.org. He doesn't have any positions in the companies mentioned. The Motley Fool has a disclosure policy.
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