Ara Hovnanian, 49, is president and CEO of Hovnanian Enterprises, the nation's No. 6-ranked home builder, with 2006 deliveries of more than 22,000 units and better than $7 billion in revenue, according to BUILDER magazine. Son of company founder, Kevork, Ara joined the company in 1979, became a director in 1981, and stepped up as CEO a decade ago. He shares his father's mission – to make the company a world-class name in real estate – and travels 40 percent of his time among more than 425 active communities in 19 states. Family, sports, epicurean delights, Latin Salsa, world travel keep him fit and happy. His wife Rachel, son Alexander, 17, and daughter Serena, 12, live near the company's Red Bank, N.J., headquarters. At midtown Manhattan restaurant, Bottega del Vino, he spent time with [smallcaps] Big Builder [end smallcaps] editor John McManus, talking about his passion for work and home.
AH: If you asked in February where we were, I would have said we were at the beginning of the bottom of the market. We had seen stabilization. Unfortunately, the sub-prime market is really throwing the rest of the housing market, either directly or indirectly, into the jitters. Now I'm not as convinced that we're at the bottom yet.
We'll see what's going to happen. Regardless, I think it's likely to be a fairly prolonged time at the bottom before we see a recovery. I don't think it's going to be a two-quarter or temporary slowdown.
BB: Do you suppose that we'll continue to see pockets of market upticks here and there?
AH:Absolutely, we see that right now. 2006 an oncoming monsoon. '07 is more like scattered showers and scattered sunshine. It's not even by market; it's really situational, by community.
BB: Do you think the volatility in broader financial markets-Asia Pacific, GDP trends and the Fed's response to them, and corporate earnings-will be of consequence in housing's market correction?
AH: I think it's not very related. We went through terrorism in 2001; we went through the Afghanistan and Iraqi wars; we went through a national recession; and housing kept plowing through all of that. I think right now that there is more psychology behind this slowdown and reaction to the pricing than the other typical factors. We have a slowdown and we don't have a national economic recession, which is unusual. We don't have job loss as we have had in the past housing slowdowns. We have good interest rates. I think the market is just jittery psychologically.
There is, perhaps, a warranted step back among consumers because of the huge run up in pricing, and the appreciation attracted a lot of investors, and there's excess supply in the market because investors bought homes; they're now not buying homes, and they're listing their homes for sale so there's a big supply. I think that's the issue; we've got to work down this supply. And the buyer psychology has to turn.
BB: How much do you regard 'affordability'-per se-as the critical source of the push-back in the market? When you look over the past three years, affordability has been diminished in so many markets, when will it come back into sync?
AH: I go back to more psychology than pure, technical affordability issues. If you go back to the peak of the market in 2005, when prices were their highest, before the psychology turned, even though it was less affordable then, we had a lot of sales. Now, prices have retreated from the peak in '05; they are lower, so affordability is better, but sales are down dramatically. I'm convinced it's a matter of this excess supply and buyer psychology.
BB: That would assume that you have some of your destiny in your own hands right now, and some it's beyond your control? What tactically can you do to bring excess supply and demand back into a more normalized balance?
AH: A lot of it's out of our hands. Any one builder can't directly reset it. We all have to be hyper-sensitive about conditions in the market, hyper-sensitive about absorption rates at locations and all the competitive discounting and incentives. We have to be realistic and mark each market at a point at which buyers will still buy. The builders all have more land inventory than we'd like to have on our balance sheets. You can't easily sell land in today's environment , so part of what we have to is to price our homes realistically so that we can sell the homes and use that as a way to slowly and systematically work down our land inventories.
BB: In terms of what your wish-list would be, would it be that the economy stays in growth mode, and that job formation keeps happening?
AH: ... positive, yes. It's not going to be as robust as it was, that's pretty clear. Slowing of the housing industry is going to slow down the rest of the economy. Hopefully, it won't throw the economy into a recession; that is a risk.
BB: It's walking a thin line between hoping for weakening economic signals just enough to get [Fed chairman Benjamin] Bernanke and the rest of the Fed to easy up on interest rates?
AH: That would be a huge boon psychologically if they did.
BB: By the same token you'd have to be concerned about some of the conditions that would precipitate a lowering of rates (i.e., recession).
AH: What was so good about our last Fed chairman was that he moved in anticipation of the market; and that prevented the last recession we had from being significant. So hopefully they don't wait until the economy falls into recession before they lower interest rates-if it goes that far.
BB: How wary do you have to be about noise about government bail-outs or increased government oversight of lending practices and environment?
AH: Government intervention, for a free-market guy, is always a bad thing. I'm more for the free markets taking care of themselves, which they are doing right now in terms of sub-prime. The lending criteria have changed, the qualifying criteria have changed, dramatically in the very recent months. I think the market's correcting itself. I think lenders have really tightened their standards; which they should have been doing. Frankly, things were much looser than they should have been.
I definitely think there's a place and a need for sub-prime mortgages. They're somewhat parallel to high-yield bond markets for companies, which was an important part of our historic growth. It is by definition riskier, and you make up for that additional risk with higher yields, or in this case, higher rates. And there will be higher default rates, just as there are higher default rates with high yield bonds than there are triple-A credit bonds. But it's an important part of the overall market.