Hovnanian Homes footprint 2016

Hovnanian is exiting markets, the headline-grabber being the San Francisco Bay area.

CEO Ara Hovnanian's talk-track addresses two issues, one, external market forces, and two, Hovnanian's "inside-job" challenges around debt and weaker operational links in its expansive 15-state footprint. Here, in his own words (thanks to SeekingAlpha transcripts), is Hovnanian's rationale for the market moves:

After much analysis of our more challenging divisions and our desire to be a more significant player in our markets with better performance, we have decided to exit Minneapolis, Raleigh and Tampa. Our plan is to exit Minneapolis and Raleigh via a bulk sale and to exit Tampa via a wind down as we deliver out our existing communities. We have a signed LOI for the sale of the Minneapolis land portfolio and we've just begun to market the Raleigh operations with strong preliminary interest from a number of builders.

Furthermore, given the frothy market conditions in the San Francisco Bay area, which are resulting in lofty, almost speculative land prices and given that we are a relatively small player in that market and we prefer to be a larger player in some of our other markets, we've decided to focus our efforts in Northern California to the Sacramento market area where we already have a larger presence. We'll wind down our operations in the Bay area in Northern California by selling and delivering the homes in our existing communities. These steps will provide us the additional capital to both pay off debt and to invest more in our remaining markets where we believe we can achieve economies and powers of scale.

It looks as if there's a buyer for the Minneapolis deal (a wistful farewell to operations and people who came aboard Hovnanian in 2005 with the acquisition of Town & Country Homes, vaunted as one of the single largest private home builder acquisitions ever at the time. Now, Hovnanian has had to concede virtually 100% defeat on two of its largest acquisition salvos of the mid-2000s, Town & Country and First Home of western Florida). And, as Ara notes, there's "strong preliminary interest" among builders in the Raleigh operation.

A couple of thoughts about all of this.

The decisions by Hovnanian are tough ones, but given the challenges ahead of keeping pace with its bond maturities and debt obligation, they qualify as necessary. The timing of Hovnanian's heightened focus on profit versus growth is reflective of a general tenor we're seeing among the public home builder peer group.

Whether or not market demand continues on its glacial improvement trajectory or succumbs to a series of challenges to consumer confidence and household income stagnancy, public home builders' collective behavior serve as a proxy for company strategies large and small.

Opportunity areas around operational excellence, sustainable reductions to "sales, general, and administration" costs, start-to-completion cycle-time improvements, and increased productivity per employee associate are the hugely important focus points of the moment. What is internal is in a home builder's control. Clearly, every line item on an SG&A, a direct expense, and intangibles, is on the table for intense scrutiny, experimentation, and improvement. In general, the market is saying, "go," generate cash now, and make it as absolutely profitable as can be.

As regards the exogenous lessons in the Hovnanian Bay Area market retreat, it's not untrue that for a home builder like Hovnanian, the market is "frothy," and it's been so for 36 months by degrees of normal internal rates of return lot analysis.

What the media is pounding on, however, and what is actually going on in the market are two separate issues. Newspapers and business television channels are waiting for a "bubble to pop." They'll report that over and over until they've got self-affirmation.

What's been true for a while is that "normal" measures of market value--based on households' earnings and capacity to make monthly payments--are out of whack for the Bay Area, and something's got to give. What that is, in fact, is anybody's guess. Are there data models that measure prevailing price trends vs. the universe capable of causing further appreciation? I'm not sure. I think the data models that measure median household incomes with housing prices are broken, outmoded, and unhelpful when it comes to discovering a market's elasticity.

This time may serve to help us learn more about the shortcomings of conventional market models that show whether there's a bubble, or a market is frothy or not.

Meanwhile, for Hovnanian, the Bay Area market is "frothy" partly because continuing to operate there will put its ability to stay ahead of imminent debt payment obligations at risk. That fact alone may be reason to concede to a market testing its own elasticity.