November 09, 2006

Homebuilder march to bankruptcy continues: Hovnanian takes $300 Million hit, first of many builders to correct cooked books


We've predicted for some time that even though they didn't want to, even though they wanted to wait until their CEOs could sell more shares, and even though they are legally required to by Sarbanes-Oxley, the homebuilders would FINALLY have to write down the inflated value of land and property on their books to correct market value.

Well, HOV announced today they were going to do just that, to the tune of $300 Million. Whoopsie! Our mistake!

Homebuilder Hovnanian Enterprises will record $300 million in charges in the fourth quarter, resulting in a loss for the period.

Roughly half the charges are associated with inventory impairments, while the other half comprises land option deposit write-off charges.

The company said it renegotiated a number of land option contracts in the third and fourth quarters, and walked away from deposits and pre-development costs on many other option contracts, because it did not make financial sense to continue, Ara Hovnanian, president and CEO, said in a press release Tuesday.

"Our financial results for the fourth quarter continued to be negatively impacted by high cancellation rates and increased use of concessions and incentives, particularly on the resale of those homes which experienced contract cancellations," Hovnanian said.

18 comments:

Trevor Cordes said...

The switch from profitability to losses occurred much faster than I had guessed. What are they going to use now as an excuse to push the stocks higher? No longer can they cry "low multiples!", "cheap".

The writedown of inventory will be massive as they 'fess up to chronic overvaluation.

The guys here still holding LEAP puts are still looking in good shape. The next leg down is coming!

GrandInquisitor said...

Big builders are dumping land on the market. This is where the volatility in home prices will come from. This is good news.

Anonymous said...

Still got my LEAP puts, pretty scary ride though...

bobbyj0708 said...

Hovnanian historically traded pre-bubble in the 3-5 range. As this all plays out, is there any reason not to believe this is where the stock ultimately falls to?

SMARTER THAN KEITH said...

Hey grandinquisitor- Explain more on what you mean by builders dumping land on the market will cause volatility? I'm thinking it does not matter much because nobody is going to build on it anyway now.

Anonymous said...

I got burned on LEAP puts in 1997. Don't try to time the market that way. You'll get creamed.

Anonymous said...

what are LEAP PUTS? I'm assuming you aren't referring to the telecom company... sorry for my ignorance.

bobbyj0708 said...

They're long term options betting that a stock will be going down. I'm not sure how a put in 97 pre-bubble put compares to one now at a much higher price level. I bet he got creamed.

Anonymous said...

And what about HOV borrowing $750,000,000.00 just a couple of months ago. How does that stack up on their books. Corporate Crap House Builders should all die a slow painful death. They rape the land and destroy beautiful rural communities.

Trevor Cordes said...

I'm positive we haven't seen the homebuilder stock lows, HOV or otherwise. How low they will go is debatable. The 5 year chart is ugly. HOV should go to 20 no problem. Perhaps even 10. Look at the pre-bubble range and do the math for a reasonable growth rate and then if you assume reversion to the mean 10 doesn't look impossible.

The debt all these guys have taken on in the last year is not going to help their cause. In fact, if/when 10Y yeilds skyrocket, it's going to cause them great pain.

Go read up on TOA and how they recently had their loans called. If that spreads to the bigger players (HOV, TOL, DHI) then things could get ugly real fast.

Short-term the charts are looking like the start of a breakdown. Perhaps today's little rally will go another few days, peter out, and shoot through yesterday's lows. Keep an eye on it.

foxwoodlief said...

Odd, the day after the elections the local press (Austin) said that mortgage lenders stock was up due to the win by Democrats. Am I missing something?

They said the push by dems for affordable housing and homeownership for the poor will bring increased lending and government funds for the poor to buy. Also they passed a bond here for affordable housing. Half to upgrade public housing and the rest to be made available to help the poor buy homes.

In my subdivision the builders are racing to build-out. There are only a few lots left and all the homes built in this neighborhood are moved into by the people who bought, not turned into rentals even though I'm sure there has to be a few rentals out there but his division is small, maybe 300 homes total and took five years to build to this point. My builder has five spec homes under construction and then they are done. The other two builders, Wilshire has about five specs as well and the third, Drees has three and maybe ten lots. They want to concentrate on their larger master planned communites.

Building here in Austin has increased significantly since I first started looking to buy a home here in the spring of 2005. They were just struggling to come out of their FIVE YEAR slump in building and home appreciation. The economy didn't implode per se but did see a significant correction and out-flow of unemployed and increase in foreclosed homes on the fringes. Now, cranes dot the skyline for new office towers and condos and a lot of homes being built on the fringes of the metro.

Prices are still stagnant in many areas but unique areas have increased as they have in other cities.

Attitudes are up-beat and positive but I do sense a little anxiety about what is read in the press about other areas like Phoenix and Florida. Friends in Phoenix still challenge me on the status of their market. I'm told I'm exaggerating as they don't see the meltdown I read about. Many are very educated and knowledgeable and one's husband is a realtor and he is still selling homes and personally hasn't seen a drop in his business. I don't know, I still think the market hasn't fully shaken out and I'm tempted to take a trip to Phoenix and spend some time driving neighborhoods and stopping by subdivisions to get a real sense of what is happening.

My parent's say things are still moving in Los Gatos and homes still sell quick in their neighborhood and no price reductions. Then again, their neighborhood is unique and Los Gatos is one of those highly desired areas and few homes available.

Stock market up and down? What's up? Any sense on where we'll be spring 2007? Will we be like Australia and London where a small slowdown and then the house market takes off again?

Aaron Krowne said...

Just remember who told you that homebuilders were still shortable because of looming write-downs.

Homebuilders messed with leverage; now they're getting burned. Makes this downturn far worse than a normal one.

Anonymous said...

hey aaron krowne-

That article was written on 10/1.

Was the $300,000,000.00 write off that HOV declared last week the same thing as in the article? For the land deposits?

I hate HOV. They are ruining everything around me. They build crap houses. Big boxes of air that appeal to the base desires of stupid people.

Farm Girl

Anonymous said...

KHOV IS THE DEVIL...

Anonymous said...

Ara Hovnanian and Larry Sorsby take turns spanking Satan with their "hot" books for fun. They way exceed the dealings of the devil.

The only reason that K. Hovnanian will not succeed in other part of the country (other than NJ) is because Ara needed to have his big dumb name plastered everywhere. KHOV bought a few GOOD builders and turned them into crap builders. Its pathetic. Ara is pathetic.

gcmmello said...

Buying a house from the department of housing and urban development, more commonly known as HUD, can be a good way to get into your first home. Unfortunately, buying a HUD home is oftentimes looked down upon. However, for many it is a really big step and a sign of progress in their life. A person looking to buy a HUD home really should start by going to the HUD web site and following the links to see what properties are available in his or her town or whatever area they're looking to live in. Applying for a home loan is still necessary when buying a HUD home, unless you have enough cash to buy the house up front. For more tips and info on buying a HUD home, visit my site at http://vdha-hud-home.info

Anonymous said...

Does anyone know more about KHov? My sister just purchased a home with them, she's not happy with them at all, now the buzz is they're in bankruptcy? Just came across this blog on accident but it appears you have some good info.

Anonymous said...

I got fired from them because I wouldn't fill out the Sarbanes report out to their liking. They want me to project $300 million profit for my area and I knew a year in advance we were not even going to hit even $200 million.

The the prick made me pay taxes on stocks I never received!

I heard that HELL is hot this time of year.