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Hovnanian Lowers 2006 Expectations as Market Cools
Although it is anticipating another record year for earnings, Hovnanian Enterprises announced last week that it experienced smaller year-over-year earnings during the second quarter than it had anticipated and that the pattern should continue for the balance of its current fiscal year, which ends on Oct. 31.
To blame, according to Ara Hovnanian, the company’s president and chief executive officer, are continuing production delays in several markets that have postponed deliveries, a slowdown in the recent sales pace, higher cancellation rates, more pronounced use of concessions and incentives, and material price increases.
Although Hovnanian rang up a 33% increase in the dollar value of net contracts in its first quarter compared to the prior year, it expects to report about a 20% decline for the second quarter when results are released on May 31.
“One factor that has negatively influenced our recent pace of net contracts is the sequential increase in our cancellation rates over the past two quarters,” Hovnanian said. “Typically, our second quarter cancellation rates are lower than those of our first quarter, which was not the case this year.”
Conditions have slowed in certain markets, Hovnanian noted, and second-quarter sales were not as strong as the company has traditionally seen.
“We believe the higher cancellation rates, in addition to an increase in resale listings and increased use of sales incentives in certain markets, are temporary aberrations as certain markets work through the increased level of resale homes for sale,” he said. “However, we remain encouraged that, supported by job creation and household formation, the long-term fundamentals of housing remain solid."
Hovnanian also said that in response to the continued cooling-off of housing activity from the “white-hot levels” of previous years, the company has renegotiated or even walked away from deposits on several parcels of land it had under control through options, a tactic it has used successfully in prior slowdowns.
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