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Hovnanian Orders Drop

Hovnanian Enterprises (HOV - Get Report) reported a 10% drop in quarterly new-home orders and said sales significantly deteriorated in October.

Some analysts now expect the Red Bank, N.J., homebuilder to implement another round of steep price cuts to clear its large inventory of houses. More than half of Hovnanian's orders in the recent quarter came during the company's heavily hyped "Deal of the Century" weekend sale.

For the fourth quarter ended Oct. 31, Hovnanian's contracts totaled 2,781 homes, down 10% from a year ago in the fourth quarter. Cancellations rose to 40% of contracts from 35% in the third quarter.

During the quarter, the company used cash flow from home sales to reduce its debt by $390 million.

Hovnanian attributed the increased cancellation rate to the tightening of mortgage underwriting standards, which has lead some customers to terminate their contracts due to an inability to obtain mortgage loans.

The results were better than expected, but more pain could lie ahead, according to Bank of America analyst Daniel Oppenheim. He expected a 25% year-over-year decline in orders.

"Sales likely fizzled after Hovnanian attempted to pull away incentives from its 'Deal of the Century' promotions the weekend of Sept. 14-16," Oppenheim said in a research note.

During the "Deal of the Century" sale, Hovnanian sold homes at fire sale prices to get rid of inventory. The company said after the sale that it had 1,700 contracts from the weekend.

"We expect that Hovnanian will reintroduce discounts similar or greater than before in order to maintain sales and generate positive cash, since competitors who matched its temporary promotions actually set new market prices," the analyst said.

Hovnanian shares were up 4 cents to $10.15 in early trading Tuesday.

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