Nicholas Yulico
Imagine buyers who are set to close on a house going for a final walk-through on a community and seeing for-sale signs everywhere, he says. In many case, builders will have to give them a price cut in order to stay, or the buyer will simply walk away from his deposit.
Buyers are "waiting until the last minute to cancel," Barron says, citing evidence he's gathered from channel checks across the country. In the second quarter, Hovnanian's cancellation rate was 32%, up from 21% a year earlier. If cancellation rates increase, then deliveries could fall short of guidance. As well, if additional incentives are used, margins would suffer even more. Hovnanian's other pressing issue, which it noted Friday, is the value of its land contracts. On one hand, Hovnanian is in a decent position since it controls most of its land through options, which allows it to renegotiate terms as the market slows. On the other hand, the company continues to write off the deposits and other costs associated with walking away from land options it no longer considers lucrative. At the end of April, the company had $465.7 million of option deposits outstanding. In addition, the company could have exposure to even more land options and owned land in its joint ventures, the details of which are murky. Hovnanian may have exacerbated its land issue last year when it purchased Town and Country Homes in a joint venture with Blackstone Real Estate Advisors. Hovnanian didn't disclose the price of the purchase, but called it the largest private homebuilder acquisition ever completed. The deal allowed Hovnanian to enter the Chicago market, while also expand its land holdings in Minnesota and Florida. All three of these markets are currently facing weakness.
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