Home Builder Talks About Mortgage Rates, Fort Myers Housing Market

Ara Hovnanian (pictured, below) is the 49-year-old CEO of Hovnanian Enterprises. He recently talked about the Florida real estate market, among other issues. Here is the interview, paraphrased …

How’s the outlook for housing for the rest of 2007?

My response is different today than it would have been a couple of months ago. Had you asked in January or February, I would have said it really looks like the market is stabilizing. Then this whole issue regarding the bad credit Florida mortgage industry came out, and that caused sales to dip. Now my prognosis is not as optimistic as it was. Obviously, the industry is still selling a lot of houses, but the recovery and spring bounce-back we had been hoping for seems to be stalled.

When do you think things might start looking better?

My guess is at least a few quarters. I think we’re right near the bottom of the marketplace. I think it is likely to stay flat along the bottom for two to three quarters. The market needs to work off some of the excess inventory of housing.

So we’re talking about the beginning of 2008?

That’s probably a reasonable guess at this point.

Are there any bright spots?

There are a number of things. Number one, Florida mortgage rates are, by historical standards, very reasonable.

Second, we don’t have an economic recession, which is typically what we’ve had to deal with in other housing slowdowns. If you look at 1981 or 1991, we had not just a housing slowdown, but an economic slowdown, to the point of a recession.

What about Hovnanian specifically? You are projecting revenues of $5.1 billion to $5.6 billion this year, compared with $6.1 billion last year. And your earnings per share are expected to drop to 40 cents, or less, per share, from more than $2 a share in fiscal ‘06.

This year is going to be a more challenging year - still a profitable one, but clearly less than it’s been. The first quarter was difficult because we took a land-related charge down in our Fort Myers area.

The second half of this year will be better. I suspect ‘08 will remain a slower year, but will likely be a bit better. In terms of real earnings growth, we’ll be more likely to see that in ‘09.

Have you been cutting prices and offering incentives? And what percentage discount do they add up to?

It varies dramatically, market to market. Many of the incentives have stopped growing, or price reductions have stopped and stabilized where they are. In the Northeast and in other parts of the country, we’ve begun to reduce concessions or slightly raise prices. If I had to guess as to what the reduction was, certainly there are many instances where it could be 7 or 8 percent.

You talked about Fort Myers, and I know that really slammed your most recent earnings report. Is that market still the worst one for you?

That’s a very tough marketplace. It just got very overheated with investors, who helped drive prices artificially high, and now they have taken their prior purchases and listed them to sell. They’ve cut back Florida mortgage demand and increased supply. So prices have dropped dramatically in that marketplace.