The combination of favorable demographic and demand conditions supporting the new-home market this year benefited Hovnanian Enterprises in the builder’s fiscal third quarter.
Compared with the more challenging third quarter of 2022, net contracts and net contracts per community increased 81% and 92%, respectively, for the home builder.
“Positive demographic and employment trends, combined with a low supply of existing homes for sale, have resulted in strong demand for newly constructed homes,” Ara Hovnanian, president and CEO of Hovnanian Enterprises, said. “Despite higher mortgage rates and a challenging affordability atmosphere, the 92% year-over-year improvement in our consolidated contracts per community is a testament to the current robust selling environment, our strong land positions, and our exceptional team.”
During the builder’s earnings call, Hovnanian highlighted the company’s pivot to increasing its offerings of quick move-in (QMI) homes as an important strategy to capitalize on the improved selling environment. Since the beginning of 2023, the share of QMI sales increased to approximately 56% in the third quarter compared with 40% historically, according to Hovnanian. At the end of the fiscal third quarter July 31, Hovnanian Enterprises had 681 total QMIs and 100 finished QMIs. The builder said it will match its starts schedule with its sales pace to keep the overall level of QMIs steady.
“The logic behind this pivot is that QMIs provide our customers with more certainty on what their mortgages will be at closing,” Hovnanian said on the earnings call. “We are still evaluating whether this pivot will be permanent on a long-term basis, but we do like the benefit right now of having a large number of QMIs along with build-to-order homes.”
The builder reported net income of $55.8 million, or $7.38 per share, in the third quarter, a decrease compared with net income of $82.6 million in the same period of 2022. Total revenue during the third quarter also decreased from $767.6 million in the third quarter of 2022 to $650 million.
Consolidated contracts in the third quarter increased 80.7% year over year to 1,444 homes, and contracts per community increased to 14.2 from 7.4 in the prior-year period. The gross contract cancellation rate for consolidated contracts was 16% in the third quarter, an improvement from 27% in the prior-year period. Hovnanian said the builder raised prices in 71% of its communities in the third quarter.
“We are clearly above the [contracts per community] levels we achieved in any third quarter for many years, other than the COVID surge in contracts in [the third quarter] of 2020,” Hovnanian said.
The company ended the quarter with a backlog value of $1.33 billion, compared with $1.79 billion in the third quarter of 2022. Community count ticked down from 108 in the third quarter of 2022 to 102 in this year's third quarter.
“Given the strength in the housing market today, we are encouraged that looking forward we believe our year-over-year comparisons for the first quarter of fiscal 2023 should show significant improvements,” Hovnanian said.
During the third quarter, Hovnanian Enterprises reported land and land development spending of $168.8 million, down from $204.5 million in the same quarter a year ago. The builder reported 29,487 total controlled consolidated lots, a decrease compared with 31,913 lots at the end of 2022's third quarter. In the quarter, approximately 4,100 lots were put under option or acquired in 40 consolidated communities, according to the company. Hovnanian Enterprises’ current land position equaled a 5.9-year supply.