Ara Hovnanian, president and CEO of Hovnanian Enterprises took the opportunity to plug the Fix Housing First initiative during the UBS Building and Building Products 6th Annual CEO Conference on Nov. 12, but while doing so he also relayed a message of hope with demographic statistics pointing to the favor of home builders.
According to projections, future demographics show that 1.4 million to 1.45 million households will be formed per year in the coming decade, establishing a "substantial increase equaling a higher level for demand," Hovnanian said.
However, he also conjured up the economic downturn of 1975, and related it to the current cycle. In 1975, the housing crisis sustained for six quarters and pulled down the DOW. The government initiated a $2,000 tax credit to home buyers.
"Today, we are in a more dire scenario," Hovnanian said, "and all of this is prior to a technical recession."
He called Congress' efforts in July and the $7,500 tax loan to first-time home buyers "inefficient," stressing that further action must be taken soon. In Hovnanian's view, that action would best come in the form of inacting the Fix Housing First coalition's proposed package of a $10,000 to $20,000 tax credit to all primary home buyers and drop mortgage rates to 2.99% for six months, and 3.99% the following six months.
Speaking to how his own company is handling the tides of the housing crisis, Hovnanian said that staffing levels have dropped 57% from June 2006 to August 2008, SG&A is down 28%, and net contracts per community are down 26%.
The company currently holds 1,300 spec homes, which Hovnanian sees as a "healthy level," but it is sitting on 23,000 owned and 23,000 optioned lots--not so healthy. "Any lots right now are too many lots," he said.
Holding $800 million in cash, however, Hovnanian said the company will weather the storm and is situated to for future success. A recent debt exchange turned $250 million of third-lien secured notes into $600 million of senior unsecured notes, leaving an option for a third lien, with the debt coming to term in 2017. Other debts include $100 million coming due in 2010 and others in 2012 and beyond.
Making lemonade out of lemons, Hovnanian said that there are some comforts looking into the future: Demographics point in a positive direction toward long-term demand; home building is a cyclical industry, and what goes down must come up; and good for some, but bad for others, competition will be lowered with some builders closing their doors or being substantially crippled from the current downturn.
Looking to 2009, Hovnanian, as well as other builders, are counting on land deals to emerge. But the opportunities will be thoroughly vetted prior to any purchase.
"We will only proceed [with a land deal] if we are able to obtain substantial modifications to option agreements," he said. "What we do is an initial analysis and disregard the sum cost, looking at the financial returns going forward on new investments. And it has to reach our hurdle rates on a go-forward basis."
He also noted that getting back to historical SG&A is "unattainable," adding that if cash flow is generated in a community then the sales office and models will stay open. If positive cash flow is not present, they will look at mothballing the project. Currently, Hovnanian has no plans to open any new communities as he does not believe this is the right time for investment.