The "steep correction" that the housing industry is going through currently "is not unprecedented" and shouldn't obscure positive economic and demographic trends that will contribute to strong and consistent housing formation over the next two decades.
That is the message Ara Hovnanian, president and CEO of Hovnanian Enterprises, the industry's sixth-largest builder, delivered this morning to investors attending JPMorgan's Homebuilding and Building Products Conference in Las Vegas.
During his 20-minute prepared presentation, Hovnanian showed numerous charts that favorably compare current market conditions with previous housing slumps, when some markets were plagued by higher rates of overbuilding, and when interest rates were much higher than today, (e.g., 18.45 percent in 1981).
Hovnanian didn't sugarcoat the severity of the current downturn, during which his own company reported nearly $500 million in real estate-related impairments for fiscal 2007. In the fourth quarter alone, Hovnanian's deliveries were off 19 percent to 3,969 homes, its contracts were down 10 percent to 2,781 homes, its backlog declined 30 percent to 5,938 units, and its cancellation rate for the quarter was 40 percent. The company noted that sales had "deteriorated significantly" in the month of October.
However, Hovnanian sees a "good long-term outlook" for his company and the industry, driven by "improving demographics" that, he believes, will help create between 1.8 million and 2 million new households per year through the next 20 years. During that period, he also expects large public builders like his company to continue gaining market share, although during the question and answer period, Hovnanian conceded that immediate growth plans are on hold. "The wisest thing to do is to wait for the market to bottom out and stabilize" over a six-month period.
Right now, Hovnanian Enterprises, like most public companies, is focusing on strengthening its cash flow. During its latest quarter, the company reduced its debt by $390 million and lowered its lot position by more than 46 percent. Hovnanian predicted that the company would be cash positive this year and next. J. Larry Sorsby, the builder's CFO, added that the company would reduce its community count in 2008.
What worries Hovnanian, though, is still-weak consumer confidence and "psychology," which is spilling into previously solid markets such as Houston, where "over the last 90 days buyers have become hesitant," he said.
Learn more about markets featured in this article: Las Vegas, NV.