Housing market momentum continued into the fiscal second quarter for Hovnanian Enterprises, with the builder reporting quarterly revenue and adjusted pretax income that exceeded the upper end of its guidance.
Demand for quick move-in (QMI) homes drove strong results in the second quarter, resulting in high deliveries, revenues, and profits, but slightly lower margins than expected, according to chairman of the board, president, and CEO Ara Hovnanian.
Hovnanian said on the builder’s earnings call that the majority of QMIs during the quarter were in the West, which has lower margins than other operating regions for Hovnanian Enterprises.
“Due to the slower housing sales pace last year as mortgage rates rose rapidly, we increased our use of concessions and we started more quick move-in homes last summer. These steps spurred demand and allowed us to achieve higher-than-anticipated home deliveries and profits during the quarter,” Hovnanian said.
Home sale revenues decreased 2.2% on a year-over-year basis to $670.7 million on 1,225 homes in the second quarter for Hovnanian Enterprises, but total revenues increased $1.2 million to $703.7 million during the quarter. The home builder reported net income of $34.1 million, or $4.47 per share, during the quarter, compared with income of $62.4 million, or $8.39 per share, in the same quarter of the previous fiscal year.
Increased demand was reflected in the home builder’s net contracts per community, which increased 100% sequentially to 13 in the second quarter. During the quarter, contracts per community improved to 4.7 in April, higher than any other month in the fiscal year. Hovnanian Enterprises also experienced a stabilization of cancellations: The company’s cancellation rate of 18% in the second quarter is in line with the 17% rate from the second quarter of 2022.
“The strength of the new-home market is supported by favorable demographics and a historically low level of existing homes for sale,” Hovnanian said. “As home demand increased, we raised home prices in approximately 69% of our communities during the second quarter of 2023. We are encouraged by the uptick in sales and believe that the outlook for housing demand will remain strong over the long term.”
Home building gross margin decreased 550 basis points to 17.8% in the second quarter, reflecting the increased demand for QMIs. The dollar value of Hovnanian Enterprises’ backlog decreased 35.7% year over year to $1.32 billion.
“Considering the doubling of mortgage rates, turmoil in the banking industry, concerns about high inflation, and general uncertainty in the economy, we are pleased with our performance in the second quarter of fiscal 2023,” Hovnanian said. “Overall, the housing market has clearly rebounded from the slowdown during the second half of last year caused by the steep increase in mortgage rates.”
QMI Strategy
After a shortage of QMIs during the COVID-induced demand surge in 2020 and 2021, Hovnanian Enterprises increased its QMIs per community from 3.2 at the end of the third quarter of 2022 to a level above 4.5 in each subsequent quarter. After peaking at 5.6 per community at the end of fiscal 2022, the builder reported a pace of 4.8 QMIs per community at the end of the second quarter. As of April 30, Hovnanian Enterprises reported 542 QMIs, including 127 finished QMIs.
“Since the beginning of the year, we’ve seen our QMI sales increase to about 60% of our sales versus about 40% historically,” Hovnanian said. “Our QMI target remains about seven QMIs per community. Recent strong sales have made it difficult to get to our target.”
Land Update
During the second quarter, land and land development spending for the home builder was $156.5 million, relatively unchanged from $154.8 million in the same quarter one year ago. As of April 30, Hovnanian Enterprises controlled 28,657 lots, a decrease compared with 33,501 lots at the end of the second quarter of 2022. Based on trailing 12-month deliveries, Hovnanian Enterprises’ current land position equaled a 5.5 years’ supply.
“Given our recent increase in sales pace, our land teams have jumped back into the market quickly and are once again negotiating new land and parcels that meet our underwriting standards,” chief financial officer Larry Sorsby said.
