Hovnanian on Housing

Recently, a host of homebuilders attended the Bank of America 2007 Homebuilders Conference where they made presentations and discussed at length their current state of homebuilding and their outlook for future.

Particularly interesting was the presentation and following Q&A by Ara Hovnanian, CEO of Hovnanian Enterprises (NYSE:HOV), who has been, in general, very straightforward about the nature of the decline and its impact on his business.

The following are some excerpts from his segment.

When asked about the signs he would be look to to indicate a turning point in the decline Hovnanian responded:

“Well clearly, one of the things we are much more focused on then we ever were before is MLS listings in a given market. That is a dynamic that’s changed, we’re tracking it in every market. At the moment, unfortunately, most markets are showing negative signs in terms of the increasing MLS listings and lower monthly sales every month. ”

Asked about the nature of “spec” homes in the industry:

“Well, certainly there are several home builders out there essentially are building specs as a means of liquidating land. In the beginning, I was more concerned because they were building new specs at a rate which was far greater than their sales. However, what we’ve seen now is those that were in that mode are basically building specs to equal their sales. So, if they sell 20 specs, they start 20 more spec, if they sell those 20 they start 20 more. I think what is going to be an important bellwether to look at and is not something that there is easy data to collect, that is the number of improved lots. I think what most of the major homebuilders are interested in doing is liquefying their capital intensive positions and that’s in developed land.”

When asked about projecting future earnings:

“At the forty thousand foot level, I think what I can say is we’re not banking on generating our big cash flows from huge earnings right now. We can’t control that at the moment the market is what it is and frankly as we said earlier, we can barely project out six months let alone all of 08.”

When asked about the quality of their current land holdings:

“Well first of all, at the moment almost any land is too much land because many times the real value to replace it today, if there was trading and there is hardly and trading, but you’ve got to think that you should be able to replace it at some point in the future cheaper. In general, yea there are places where I wish we had less land. Florida for sure, definitely parts of California for sure, but even those markets we’ve got properties that are undervalued and I wish we had more lots in them.”

“We are, in interesting cases, we walked away from a couple of parcels of land that were under option… the land sellers have come back to us, offered us property at realistic valuations after they tried to shop it to other home builders, couldn’t find anyone else willing to pay unrealistic prices and we have re-entered new contracts at substantially lower prices.”

“But the number of opportunities are far far less than our burn rate right now.”

When asked about price reductions in their southern California markets:

“We are, in Riverside County and San Bernardino County definitely having to adjust prices recently, as recent as the last month in that marketplace to keep pace and it is very competitive. As one competitor lowers prices and sucks away all the sales, the other builders then have to react basically it’s becoming little bit of a ratcheting effect. We saw the exact same thing in San Diego.”

Speaking generally on assessing the outlook for the future, Hovnanian suggested:

“The interesting thing about this particular slowdown, and I guess I don’t want to be painted as an optimist because we’re acting quite conservative today. But there is some interesting spread of light out there that’s worth mentioning. The last two major slowdowns we had to deal with, 81 and 91, were very different economic environments. We had a national recession going on in both of those periods that was full on, numerous quarters. We had job losses. Today we pick up the paper and read bad news about homebuilding, back then we were reading about layoffs at every major company imaginable every single day. That was a very challenging environment and if that wasn’t enough we had very high interest rates particularly in 81 but relatively speaking in 91 we had very high rates.

Today, it’s a very interesting time because demographically demand is better. Every actuarialist and demographic scientist is predicting higher household growth. Secondly, the economy is good, a little slower than it was in 05, but still positive 1-2% is the outlook which is not terrible, not job loss but job gains. And three, interest rates are pretty good.

So it’s a more optimistic environment, I think, to turn the corner at some point.

If we could just get through some of this inventory overhang and most importantly, if we can get through the psychological effects that’s really taken over the consumer today.“

Listen to the complete presentation here as well as the presentations by Toll Brothers executives and DR Horton as well.

Homebuilder Hoedown!

Yesterday JP Morgan held their Basics and Industrials Conference bringing together, amongst others, a host of top homebuilding executives to present their outlook for the new home business going forward.

Many homebuilders shared some particularly revealing insights in an effort to set the record straight on issues ranging from the subprime meltdown to DR Horton CEO Donald Tomnitz’s use of the word “suck”.

During the Hovnanian presentation, CEO Ara Hovnanian talked at length about current and future land purchasing as well as his take on raising interest rates.

When asked about their prospects for new land purchases, Hovnanian answered:

“I can tell you our new land purchases are down to a trickle right now, we had been looking and the reality is again, we’ve seen every cycle, the land sellers are always the last to recognize the housing slowdown and hat typically has happened is that housing prices have come down first, and the land prices ultimately come down but they’re always trailing. While prices come down and terms come down, they never come down to equal housing prices till much later in the down-cycle.

When we do new land purchases, we have to make our threshold returns at current net-net prices after all incentives and concessions and net-net absorptions after all cancellations. Today, we’re finding very very few land parcels that meet that criteria and frankly, with the market in transition and without being very stable and now with our greater focus on cash flow, I can’t say we’re anxious to go out and buy some land right now.

We have probably gone from 20,000 (properties) to less then 1,000 that we have purchased in the last six months so it’s dropped dramatically and I don’t see that changing over the next six months.”

When asked at what point mortgage rates would begin to effect buyer ability to purchase new homes, Hovnanian responded:

“It’s hard to predict that, I can just say this, prices of homes have corrected dramatically that makes all housing a lot more affordable without a doubt. The lower the mortgage rates, obviously, the more helpful it is. Psychologically, I used to say over 8% was probably the point where it starts to become more harmful, today if long rates go over 7% I just think psychologically it may be more of a barrier but we’re a ways from that right now. I think we’ve got lots of things to worry about in the homebuilding business, personally I don’t think mortgage rates are high on my radar screen of big concerns. I just think that there are other risks or factors that we’re more concerned about than interest rates.”

Listen to the entire Hovnanian presentation here.

During the Toll Brothers presentation, Fred Cooper, Senior Vice President of finance and investor relations was asked about the outlook for impairment charges resulting from land write-downs for which he responded:

“In total we’ve had about $360 million in write-downs over the last three quarters, about $250 million of it has been on owned land and then $110 million on optioned land. Generally I think more of the write-downs have come on land that is less mature where they were put under option based on stronger market assumptions. … Most of the write-downs are on land that is relatively newer and we can’t really predict what the next couple of quarters will bring in terms of write-downs but if the market, in a particular community weakens, that could tip it over the edge. It’s very hard to predict and when we gave our guidance for 2007 recently on our call we said that we’re not able to predict future write-downs at the moment.”

Listen to the entire Toll Brothers presentation here.

During the DR Horton presentation, CEO Donald J. Tomnitz provided, as usual, many candid tidbits.

Discussing the fact that DR Horton had the lowest impairments for the industry, Tommnitz stated:

“I know we have been criticized by many for not having as many impairments, it’s amazing to even get criticized for, I think, operating perhaps a better company than other. But let me tell you a couple of reasons why I think we have had fewer impairments at least then others. One is, clearly I think we are more astute land buyers. Ok, you can look at that and say “Punk, you can’t prove that” well as we move through the market we’ll find out whether I’m right or wrong. I think the second part of that is that we have never done any JVs, we have inherited JVs so as a result we have always had a policy in our company of not doing deals that are too large for us. If we had a deal that was too large, we would pass. And many of the impairments are coming from deals that people did that were too big at the time.”

When asked about the effects of the subprime meltdown, Tommitz stated:

“I believe I’m correct in saying, when I was out in Phoenix last week, FHA is in the process of, in the next 60 days you’ll see them implement some new mortgages which basically are going to include 100% loans. I have no idea why they are going there but they’re going to include 100% loans. And as a percentage overall, if you talk to all of our division presidents, the subprime, alt-a scenario has been totally overblown by the media and we don’t believe its had a significant impact on our business.

What has had a significant impact on our business and what I think it’s going to take to get the homebuilding business back clearly on its feet is that we still have excess inventory on the marketplace. We have too many homes under construction that are unsold. I think all the builders are doing a great job in terms of starting fewer homes because that’s what we need to do.”

“I was in Phoenix, the level of existing homes that have been historically on the market in Phoenix has been about 25,000 right now in Phoenix it sits around 52,000. In Las Vegas it’s supposed to be about 20,000 it sits today at about 40,000. But we’re not receiving as much direct competition, as all of you would like to believe, from existing home buyers. And why? Because the investors bought homes from us. And they typically bought them at 100% financing. So, they bought a home from us at $270,000 that same home today we may be selling for $250,000. So, there are going to have to do one of two things. They’re either going to have to keep that home and rent it for the next two to three years till the prices come back up to $270,000 or they’re going to have to sell the home for $250,000 which is what we’re selling the home for today. I don’t know about you, but you can to Mr. and Mrs. America and there aren’t many people who can take that $270,000 and sell it for $250,000 and take a $20,000 check from their bank to the title company and close the transaction. So those existing homes are going to be leased because almost all of them have 100% financing on them or a lot of them do, especially the investor loans, so we’re not really competing with that inventory.”

Later Tomnitz talked a bit about his now infamous “Suck” comment.

“One of the reasons I don’t want to interview with CNBC is that they made a big deal out of a word that, after four years in the Army, raising two teenagers, riding Harley’s and being in the homebuilding business for a number of years I had no idea the word “Suck” was a cuss word (laughter) but for any of you ah… if that bothered you and I insulted you I apologize but it just didn’t occur to me. … What I wanted to say was that the homebuilding business is going to suck for the homebuilders in 2007, but it’s going to be a windfall for the homebuyers.”

Listen to the entire DR Horton presentation here.

Whaler or a Yatch?

Today, Ara K. Hovnanian, CEO of Hovnanian Enterprises Inc., presented the results of Q1 2007 showing a net loss of $57.3 million.

This reflected a significant series of pretax impairment charges related to their Fort Myers-Cape Coral Florida operations which totaled $93 million.

Apparently, Hovnanian acquired land and started building in the Fort Myers area in August 05, the exact month that MLS listings in that area soared from less than 5000 to over 20,000.

The first quarter also showed a 36% cancellation rate, the highest Hovnanian has recorded since the downturn began.

Hovnanian is now projecting a decline in deliveries of 14.8% to 20.8% below the 2006 actual of 20,201 units resulting in an 8.2% to 16.4% decline to total revenue from the 2006 $6.1 billion total.

But with all this, Hovnanian, although sounding very tentative and even explicitly reiterating that he is tentative, suggests that many markets may be starting to stabilize.

“Its not getting worse and it is slow and steady.”

“To use a weather analogy, it’s not longer a monsoon but it’s been downgraded to scattered thunder showers”

Making another analogy, Hovnanian suggests that the market is possibly near a bottom with a “boat hull” shaped recovery.

“Consequently, we are optimistic that the market may be near a bottom or could achieve a bottom some time soon, perhaps near the sales pace and prices that we are experiencing. When we do find the bottom, of this market downturn we are not anticipating a V-shaped or even a U-shaped recovery rather we believe the recovery is more likely to first exhibit a prolonged period of stabilization and fairly flat performance before turning up. I visualize this projected pattern of improvement as being similar to the shape of a boat hull, moving from the stern to bow, with the stern representing a recent sudden fall-off in the market and the bow representing the ultimate recovery with a more gradual smoother shape after a flat period in between.”

“What we don’t know is whether the boat is an 18 foot Whaler or a longer sea-going yatch.”

As for the percentage of buyers using sub-prime loans in order to finance Hovnanian homes, Hovnanian reported that based on roughly 70% of transactions, 18% of fiscal 2006 and 14% of Q1 2007 were financed with sub-prime loans that were either brokered or originated by Hovnanian’s own inside mortgage company.

When asked about the 30% of transactions that wasn’t captured, Hovnanian’s CFO J. Larry Sorsby answered:

“The real answer is we don’t know for sure but it wouldn’t surprise us if that 30% was more highly weighted towards sub-prime than our 70% was but that’s just a guess, we just don’t keep that data… and you know the overall markets use of sub-prime.. I’ve seen statistics around 20% so my belief is that our use of sub-prime is not unlike the overall market.”

“If you had asked me two weeks ago, frankly we hadn’t really focused on this a great deal, we would have been working under the premise that we were 5%, 6% or 7% use of sub-prime but once actually did the analysis and got the data put together, were telling you what our mortgage company originated.”

Sorsby goes on to suggest that California has always had the most use of creative loans and that the likely outcome of tightening standards will shrink the market of buyers but that it was hard to quantify.

Ara Hovnanian the added:

“The sub-prime mortgage market has not gone away, they’ve just tightened the criteria … that clearly does shrink the pool of potential qualifying buyers but that market has not gone away.”

Additionally, it appears that Hovnanian has taken some fairly significant steps to contain costs reducing the company’s head count of the company by 20%.

Larry Sorsby suggested:

“We have already reduced head counts for the last three quarters by 20%... What we are going to do going forward is as particular markets experience slower sales we will obviously right side the organizations market by market and if they have great sales we wont have to make adjustments.. It’s a market by market situation.”

The complete audio of the conference call can be listened to here.

housing+bubble housing bubble realtor real+estate subprime arm+loan lenders mortgage hovnanian toll+brothers home builders economy recession greenspan bernanke

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