Hovnanian Ushers In The Next Housing Market Collapse

As we discussed on our first quarter conference call, we expected our second quarter gross margin to be adversely affected by incentives and concessions on started unsold homes. However, the impact was greater than we anticipated and we are disappointed with our second quarter results.  – Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer,  HOV 2nd Qtr 8-k

There’s a reason Ara Hovnanian dumped 315,000 shares of HOV stock on April 16th, 2015 – Insider stock selling ahead of an earnings disaster.

Hovnanian greeted the stock market this morning with a big earnings miss.  It’s stock plunged as much as 15%:

HOVI may have been a bit early in forecasting my demise of the housing market, but I know I’m right.  HOV is the 7th largest homebuilder in the country.  It sells homes in 18 States, including the largest housing markets for new homes like California, Texas and Florida.   HOV primarily sells into the first-time and move-up buyer market.  In other words, it’s Q2 results are a good barometer of the market for new home sales in general.

Although it’s revenues were higher thanks to the bubble in new home prices, HOV’s gross margins plunged 400 basis points from 20.1% last year in Q2 to 16.1% in its latest quarter. This is due to the expense associated with started but unsold homes. A feature that is endemic to every homebuilder I research.  It’s total unit home deliveries dropped 3.2% vs. the Q2 2014.

It’s Cost of Sales also includes over $4 million inventory and land option write-offs vs. $522k in Q2 2014. While not large relative to its total cost of sales, inventory and land write-offs are going to become a recurring feature with every homebuilder going forward.

Despite a decline in home deliveries, HOV ballooned its inventory by $200 million in the last six months ($1.3 billion in Oct 2014 vs. 1.5 billion at the end of the most recent quarter). Inventories at all of the homebuilders have swelled up to record levels – even highher than at the peak of the big housing bubble. This is despite the fact that unit sales volume is roughly 1/3 of peak unit sales volume.

An even more shocking fact is that the amount of debt per housing unit sold at EVERY homebuilder is several times higher than it was at the peak of the housing bubble. For instance, at $1.95 billion HOV’s debt load has increased $259 million in the last six months. On a trailing 12 month basis, HOV has delivered 5,836 homes. This translates into $333,790 of debt per home unit delivered.

I have always predicted that HOV would be the first homebuilder to hit the wall.  This is why I have not published a research report on the Company: It’s stock has been below $10 since late 2007. It’s not worth shorting.

However, I have published in-depth research reports on the two stocks that I think are most likely to follow HOV into the bankruptcy abyss.  Both of these companies have operating and financial profiles which are quite similar to that of HOV.  Both of these stocks plunged and then rebounded about six months ago.  I believe that we will see them plunge and stay down at some point in the next 3-6 months.  The problem is, you have to positioned ahead of the plunge or you will miss it.

You can access the report for either company here:

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I will have more on this later, but now the legacy home equity loans left over from the big housing bubble are going to start torpedo-ing the financial system. No one has thought about these roadside financial exploding devices, but starting in mid-2014 and ballooning up quickly from there, home equity loans sitting dormant other than a small monthly interest payment have been and will be converting to fixed-rate amortizing 2nd mortgages. The monthly payment on these will double or triple for most homeowners with HELOCs resetting. The amount sitting on bank balance sheets is over a half trillion dollars. For its quarter ended March 31, the delinquency rate on its HELOC balances jumped 124%.

Just when mom and pop home flippers were thinking that the water was nice and warm, they are going to get ripped apart by a new wave of distressed home sellers and foreclosure auctions. For the record, I search for home listings on just one zip code in central Denver. I am now getting at least one “new price” email per day, including three yesterday and one today already. The next leg down in the housing market is starting…

11 thoughts on “Hovnanian Ushers In The Next Housing Market Collapse

  1. This is merely my own observation, so take it as that, but in the local Toronto newspapers, there seems to be an awful lot of ads lately telling the common man how huge profits can be easily made in real estate (flipping, essentially). Looks fishy to me. Is that some kind of warning that the next leg is down? Not just in the US, but also in Canada?

    1. Yes. In fact, I just realized yesterday that I have not heard any ads for home flipping seminars on the main Denver sports radio station in a few weeks. Like from Feb thru mid-May I heard the ads every hour. I have not heard any for at least 2-3 weeks. It coincides with the sudden spike in listings I’ve been seeing.

  2. So Dave, when would be the best time to buy if you’re in the market for a new home? I’m wanting to relocate from Florida to Colorado and am faced with both a collapsing housing market and an imminent fed rate increase. Do the two interrelate at all?

    Also, does the housing market translate to the land for sale market? I’m actually more interested in land to build a house on than an actual existing house.

    Thanks in advance for any replies you have the time to make, and a lotta’ thanks for the time you take to keep us informed!

    Take care.

    1. Wait for the market to crash. You can find awesome apt rental deals all around Denver right now and it’s only going to get better as more and more new buildings get finished.

    2. Chris:
      I agree with Dave.
      I just finished an involved missive responding to you and it bombed. Ugh! so here goes…..
      Anyway like you I have been investigating the idea of building – deal is land prices are through the roof out there – many anecdotes on this but I won’t belabor the point.
      In my case after drawing a decent set of design drawings as I am architect – I sent them to a contractor referred to me out there in CO and before a shovel was thrust in to the dirt I was into this for 250 to 300k – this just for dirt, fees, permits, tap fees and purchase of dirt – 1.5 to 2 acres. My pool of sites was limited as I don’t want sites without public utilities – septics, propane, wells etc. not for me thank you.
      Also spoke with a planning guy in Doug Co when there in March of this year – asking about lower priced sites in and about Doug Co.. He said that the lower priced sites , i.e. an acre at say 65k as listed on corelogic or RE Colorado have many issues the least of which is that they are unbuildable due to lack of utilities. In Larkspur just south of Castle Rock there are these types of sites, some in the midst of homes already built and roads with utilities outboard of the developed sites and after some due diligence and talking around I come to find that the ones that are in developed areas down there that are cheaper require major infrastructure work – i.e. lift stations and the like which the locals are not want to pour money into. Many of these infrastructure projects are at least 10 years out at the present time according to Doug. Co. In my talk with Doug Co I had heard of a guy from FL wanting to build – saw said sites on the web and bought sight unseen only to find that he can’t get water sewer etc. to his site because of said infrastructure. He is now out near 100k as there is a no recourse law in CO on these sorts of purchases. I find that amazing but apparently true. If you are serious about building you HAVE TO SEE THE DIRT. In my driving around many sites just cannot be excavated or built on and frankly I find it reprehensible that CAR would even allow a Realtliar to list these things.
      So do your due diligence before making any offers and having been in this process for a couple of years now it is really important that you do the work – no one else will do it for you.
      Good Luck in your endevours.

      1. So as not to clutter up this thread with off-topic conversation, is there some way I can contact you? Email perhaps?

        Thanks for the info, meanwhile.

    1. I wonder why they would cover them now, given the persistent rumors over the last few years about the comex forcing cash settlement .

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