Hovnanian Enterprises (NYSE:HOV) president and CEO Ara K. Hovnanian told analysts during a late morning conference call Wednesday that he saw clear signs that the housing market is improving.

"We have seen more than the typical seasonal uptick in sales throughout our second quarter," said Hovnanian. "The seasonal aspect of the pickup in sales is not unusual, but it's noteworthy that this is the second consecutive quarter that our contracts-per-community were up year over year."

Hovnanian said contracts-per-community rose 25% to 7.4 during the company's fiscal second quarter from the comparable quarter last year. That came on top of a 5% increase during the first quarter compared to that in the previous year.

He noted, however, that the company's net contract overall were down 29% from the quarter but attributed the decline to a reduced community count.Hovnanian had 215 active communities at the end of April versus 379 a year earlier and 245 during the first quarter of fiscal 2009.

He saw evidence of a housing uptick elewhere as well: in Multiple Listing Service data that shows sales up and inventory down in many markets. "In some markets," said Hovnanian, "You could almost make the case that months-supply has corrected too much."

"These markets feel better today," he said.

Among them are hard-hit Stockton, which he said was down to a two-month supply of homes for sale; Bakersfield, which is slightly over two months; Phoenix, where sales just hit a seven-year high and inventory is down to five months; and Virginia, which is down to a three-month supply.

"The trends in our month net contracts-per-community plus the trends in market-specific existing-home sales data indicate an improving housing market in spite of all the uncertainty regarding the economy," Hovnanian said.

The sales have come at a cost. The company has been cutting prices to compete with foreclosures and existing-home sales, sacrificing margins to cash flow. In fact, Hovnanian said in some markets management is willing to accept as little as $15,000 to $20,000 in cash flow per lot. "However, it is safe to say the rate of decline in home prices has recently declined in most parts of the country."

All that said, however, Hovnanian admitted that the current annualized rate of sales per community of 23 homes per year has a long way to go to catch up to the normal-market rate of 42.

But cash is the only solution to the company's most pressing problems: extreme leverage and equity erosion. The company's total debt-to-capitalization ration was at a very uncomfortable 97%, even with the company's recent purchase of $525 million of its public debt for $208 million and a less than aggressive debt maturity schedule through 2012. Moreover, a winding trail of big time balance sheet impairments, such as the $318.9 million the company took during the quarter, have whittled stockholder equity down to $61.4 million as of April 30, as compared to equity of $330.3 million as recent as the company's fiscal year-end on Oct. 31.

If the company can build on the $779 million it already has, it can continue to pay down whatever longer term debt they can, given various covenant restrictions, and work to essentially replace current lot supply with new lots that have a lower cost basis, which will in turn generate better returns and ultimately rebuild equity.

While the land market has been at a standstill thanks to more or less unbridgeable gaps between bid and ask prices, Hovnanian said that there appeared to have been a significant loosening in the market in the past 90 to 120 days. He said banks are beginning to more aggressively market deals that would pencil to an unlevered IRR of between 25% and 30%. In fact, Hovnanian said despite having bid on a number of deals the company finally snagged a contract on 160 lots in Florida for roughly $25,000 per lot, or 11% of the original cost of the parcel.

"There are once in a generation opportunities to reload and reinvest in land," Hovnanian said.

However, analysts questioned whether additional investment in land was prudent given the company's leverage. Hovnanian pointed to the company's three years worth of supply of lots and reiterated management's desire to find joint venture partners to help share the risks and cash outlays for the acquisitions. Although the Florida deal he mentioned did not involve a financial partner, Hovnanian said "now that we have one, we're finding good reception. The issue hasn't been finding investment partners; the issue has been finding solid deals," he added.

Hovnanian late Tuesday reported a net loss of $118.6 million for its fiscal second quarter.