Commentary

Major Home Builder Hovnanian Reels from Losses

The real estate market’s death spiral is taking a heavy toll on publicly traded home builders. Hovnanian Enterprises, the embattled and bruised New Jersey-based McMansion builder reported another staggering loss in the quarter that ended October 31. The total amount of red ink generated amounted to $469 million, or $7.42 per share. This compares to a year ago loss of $118 million, blowing past wood glue-sniffing analyst estimates that called for a shortfall of only $1.63 per share.

Following the lead of Wall Street investment banks, Hovnanian reported a monstrous pre-tax charge that included $168 million to account for the plummeting value of land and inventory. The company also digested a $216 million non-cash valuation allowance that is now required by companies reporting consecutive losses (companies are no longer able to carry deferred tax credits indefinitely). These two items brought the total pre-tax charge to $384 million. (Earlier this week, Morgan Stanley, the yellow-shoed investment bank, reported its first quarterly loss after adding an additional $5.7 billion write-down due to fast-sinking mortgage-related investments and trades.)

Setting aside the pre-tax write-down bombshell, Hovnanian’s operating numbers were enough to make investors reach for manhole-sized tablets of antacid. Net sales contracts slid 10 percent, and revenue skidded 20 percent for the quarter. This reduction in contracts signed and sales generated could be attributed to a 40 percent cancellation rate – up from 35 percent in the previous quarter.

According to Daniel Oppenheim of Banc of America Securities, as reported on CNN Money.com and Newsday.com, Hovnanian faces liquidity concerns, and is discussing compliance on loan covenants with its creditors. Apparently, the land buying and home building orgy was enabled by large amounts of borrowed
money.

Hovnanian’s latest dismal quarter will probably not be the last. As it scrambles to reduce housing inventory and make nice with lenders, its financial health sits desperately on a razor’s edge. But, Hovnanian is not alone. Judging by the dismal results reported by a wide range of companies associated with the real estate industry, the pain of this market’s decline is spreading like a plague on Red Bull.

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