Hovnanian Plans $775 Note Sale to Pay For Tender

First, let me just commend Hovnanian for still being in business. The beleaguered home builder is number one at the top of many investors' lists in the homebuilder death pool. The problem? The company took on too much debt to go on a land-buying spree during the boom and is struggling to pay off that debt while the value of its inventory has declined along with its revenues and profits. To solve the problem, the homebuilder came up with a brilliant plan. Hovnanian will buy back its debt that is trading at a discount, allowing it to book a profit. Of course, it doesn't really have the money, which is kind of the problem to begin with. But, no worries. They'll just issue some debt. Debt investors have proven time and time again that they are total suckers, so the plan should work well. Issue debt, buyback debt, book profit, stay in business a few more years. It's called kicking the can down the road.

Some Thoughts on the Home Builders

The Wall Street Journal has an interesting story this morning that summarizes the main issue facing the homebuilders: a glut of housing inventory, some of it from foreclosed properties in their own developments.  The article has examples of new homes built as little as two years ago in new home developments that are now in foreclosure and offered at steep discounts to nearly identical houses in the same development.  One example is in the Inland Empire of Southern California where the foreclosed house is offered at $229,900 compared to a nearly identical house offered by the developer for $299,000.  Fortunately, the builders have spin on their side, as the article is filled with quotes such as "Our brand-new homes appeal to the buyer who wants up-to-date features and a chance to make their own selections like carpeting and paint colors" from a spokesman at Pulte.  Even better is the one from the Centex CEO that claims "In general, we try not to compete with foreclosures.  It's not all about price, it's about value."  I've always thought that price and value are somehow correlated, but maybe I'm wrong.  I'm fairly certain, however, that those buyers in the market for a house in the $229K price range will likely calculate the cost of a new carpet and some paint, if they happen to hate the current choices in the abandoned house, and it will equal less than $70,000.  That is a value proposition if I've ever heard one.

Meanwhile, in RealityLand, Hovnanian posted a worse-than-expected loss of $178.4 million for its fiscal first quarter, compared to $130.9 million in the same quarter of last year.  Revenue tumbled 66% to $373.8 million.  Who does the CEO Ara Hovnanian blame for its lousy quarter?  Why, the government, of course: "Given the lack of steps taken by the federal government to address housing demand, prospective homebuyers are still faced with making the decision to buy a home against an exceeding difficult economic backdrop."  While its true that if you ignore the $750 billion in TARP funds shoveled into banks to keep them lending, the multi-billions in mortgage modifications enacted, Operation "Hope for Homeowners", the $200 billion conservatorship of Fannie and Freddie, the bailout of credit unions, extension of the Federal Home Loan Banks borrowing ability from the Fed, the TALF, TAF, TSLF (insert 15 more acronyms) from the FED, the government has positively fallen asleep at the switch.  But frankly, Mr. Hovnanian has no one else to blame for his company's current misfortune other than himself and his compatriots, who borrowed too much money to buy too much land at inflated values and built too many houses in what was clearly a bubble (and yes it was very clear to many.)  Now the builders are getting a bunch of tax breaks (Hovnanian received $145 million in a government tax refund in the first quarter) and many of them won't make it DESPITE what has been a ridiculous amount of government intervention to prop up the housing market.  Mr. Hovnanian may complain, but I'm not shedding any tears.       

Hovnanian and Toll Post Steep Losses, Plead For Help From Congress

Hovnanian lost $5.49 a share, or $340.7 million in the second quarter. Hovnanian's losses included $250 million in land-related pretax charges. This means the company only lost around $90 million selling houses. The earnings report was littered with a bevy of minuses including a 30% drop in revenue, a decline in the average price of homes sold of 16.50%, and a 39% decline in net completed contracts. This is the seventh consecutive quarter in which Hovnanian has posted a loss.
Meanwhile, in luxury homebuilder land, Toll reported a loss of $97 million or 59 cents a share. Although the bulk of Toll's losses were related to charges against its inventory of land (they actually made $81 million selling houses), net contracts dropped by 58% from a year ago.  Frankly, I could care less if these numbers met or exceeded analysts estimates.  They are still losing gobs of money, writing down inventory, and seeing steep declines in contracts signed.  When that stabilizes, call me.  Otherwise, I remain a bear on the homebuilders.

In a conference call with analysts, Toll stated that Congress should offer would-be homebuyers a tax incentive to buy a new home, claiming that this should be a much larger priority than bailing out mortgage lenders and homeowners currently facing foreclosure. It you set aside the the fact that it is an obvious self-interested plea for help from Congress, it is an interesting idea, although I would present a different twist. It is true that home prices will never hit bottom until the enormous inventory build-up is reduced, particularly in areas where a significant number of homes on the market are foreclosed properties. What I would suggest to Congress is that they offer a tax incentive for purchases of foreclosed properties. This would give potential homebuyers as well as investors an incentive to clean up the backlog of foreclosed properties. The incentives would be skewed to more credit-worthy homebuyers and liquid investors (presumably because you can no longer get a loan otherwise), thus rewarding prudence, rather than the foolhardy spending of the bubble years. Maybe then, when the cheaper alternatives disappear, people will return to the new home market to buy a home from the homebuilders. That is, of course, assuming they're still around...