High inflation, mortgage rate increases, and “significant economic uncertainty” adversely impacting housing demand contributed to year-over-year declines in home sales revenue and contracts per community for Hovnanian Enterprises in the fiscal first quarter of 2023.
During the quarter, ended Jan. 31, home sales revenue decreased 9.4% year over year to $499.6 million compared with $551.4 million the previous fiscal first quarter. Contracts per community in the fiscal first quarter decreased to 6.1 from 14 a year ago.
Additionally, consolidated contract dollars in the first quarter declined 48% to $415.1 million compared with $798.3 million the same quarter of 2022.
However, Ara Hovnanian, chairman of the board, president, and CEO, noted the contracts per community were comparable with the first quarter of fiscal 2019 pre-COVID. In addition, he said contracts per community increased sequentially throughout the months of the fiscal first quarter and through February to date.
“From November’s low point of 1.2 contracts per community, we increased to 1.8 in December, and ended the quarter with 3 contracts per community in January,” Hovnanian said during the home builder’s quarterly earnings call. “The positive trend continued through February, with contracts per community increasing to 3.4. We believe this positive sales trend bodes well for a strong spring selling season.”
To enhance affordability and help the company find a market-clearing home price, Hovnanian said it implemented a 470-basis-point increase in incentives and concessions during the fiscal first quarter compared with the same period in 2022.
“After our fiscal 2022 year ended, we became more aggressive with our concessions on new contracts. Our improving trend on contracts per community indicates that these steps worked and that we found the right market-clearing price to sell homes,” Hovnanian said. “We continued to offer customers incentive choices, such as paying for a temporary or permanent below-market mortgage rate, closing cost payments, offering discounts on options or upgrades, or discounting home prices on select quick move-ins.”
Hovnanian said due to the company’s backlog strength, recent improvements in sales pace, and “above-average gross margins” on new contracts and homes in backlog, the home builder expects strong financial performance for the duration of 2023.
“Given the recent increase in home demand, we modestly raised prices in approximately one-third of our communities around the country over the last month,” Hovnanian said. “Despite this uncertain [mortgage rate] environment, our sales this past week were the best week of sales we have had in months.”
The builder reported a cancellation rate as a percentage of gross contracts of 30% in the fiscal first quarter, a sequential decline from 41% in the fiscal fourth quarter of 2022 but well above its historical average between 18% and 22%. Hovnanian said on a monthly basis, cancellations peaked in October at 45% and steadily decreased each month, reaching 16% in February.
Quick Move-In Homes
Hovnanian said the company is continuing to see increased demand among consumers for homes that can be closed quickly. The builder pivoted during the fiscal fourth quarter to provide more quick move-in (QMI) homes to meet consumer demand. As a result, the builder reported a QMI per community of 5.5 at the end of the fiscal first quarter, a significant increase from 3.2 per community as recently as the third quarter of 2022.
“Consumer demand for QMI certainly remains quite strong. Since the beginning of the fiscal year. We’ve seen our QMI sales increase to about 60% or our sales versus about 40% historically, representing a 50% increase,” Hovnanian said.
The company has set a temporary target of seven QMI per community and, once the goal is reached, it plans to match its start schedule with the current sales pace at that point in time to avoid starting too many homes.
Land Update
Chief financial officer Larry Sorsby said the builder suspended most new land acquisitions during the rapid increase in mortgage rates during the summer of 2022. As a result, the builder’s lot count decreased sequentially beginning in the fiscal third quarter of 2022, reaching 29,123 at the end of the fiscal first quarter of 2023. Sorsby said approximately 60% of the company’s total lots are located in its strong Southeast and Northeast geographic locations.
“Given our recent increase in sales pace, our land teams are once again actively pursuing new land parcels that meet our underlying standards,” Sorsby said. “Our land strategy is very risk averse with our focus on controlling lots primarily through our options contracts. It is important to highlight that our owned lot position declined by 20% since the second quarter of fiscal 2022, while our option land position only deceased by 10% over the same time period.”
