Monday, 17 September 2007 05:00

Hovnanian Announces Successful Preliminary

Excerpts from the PR Newswire story, along with my usual smart ass comments...

"Over the course of the three-day event, the Company reported more than 2,100 gross sales..."

Now, who the hell do they think they are fooling? Can anyone visiting this blog define a 'gross sale" in residential real estate. They put press releases out as if they are retailers. This is BS at its best, or worst - depending on your perspective. But it gets even richer.

"including more than 1,700 contracts and more than 400 sales deposits."

How can they have 1,700 contracts, but only 400 deposits??? Are the contracts binding without deposits??? Oh, wait! There's an explanation for this conundrum in the very first paragraph of the press release!!!

"Due to the overwhelming number of customers who visited our communities during the 72 hour sales event and strong demand for our homes, our sales staff in some of our community locations only had enough time to take deposits from our customers rather than completing the more extensive process of taking contracts. Appointments have already been scheduled with these home buyers who gave us deposits to complete the final sales contract paperwork over the remainder of this week."

Okay, I get it now.

Since, oh so many people were banging down the doors to buy these houses in the beginning of a real estate bear market, the Hovnanian staff only had the time to take deposits from some of the customers, and not contracts - whose contents of course dictate the terms of the deal. Yet, they count this as a gross sale. I offer you a half a million dollar piece of property, at a discount of course, you give me some money as a token of our mutual honesty, and I consider the event a "gross sale", whatever the hell that is - and even issue a press release on it (it would be law suit material of Microsoft pulled a stunt like that). But wait a minute. If the staff only had time to take deposits because SO many people were trying to buy, how in the world did they get more then five times as many contracts as deposits??? Shouldn't it have been the other way around? Do these people sign the sales contracts without legal counsel??? A bigger question - Even with the moniker "gross sale", isn't it a tad bit aggressive to label something a sale without even the terms stated and agreed upon? But, I digress. Let's get to the main point. It is not a sale until the deal has closed, the mortgage loan has funded, and title is passed. I doubt any of that happened last weekend. I may have to consult the experts at Hovnanian on this one, but I think that, at least in the industry parlance, that would be known as a "net sale". These guys are real funny - and I thought I was funny...

"In addition to the significant number of contracts and deposits taken, the Company experienced a very high level of traffic from interested buyers in our communities, and we had a seven-fold increase in visitors to our website over the past few days. Even though we substantially increased our website's processing power, the response time for visitors to slowed dramatically."

So now that we know you need better network techs, show us where you made some money...

"The preliminary results from our 'Deal of the Century' sales promotion exceeded our expectations," stated Ara K. Hovnanian, President and Chief Executive Officer of the Company. "The high level of traffic we saw in our sales offices and models over the weekend and over the past several weeks convinces us that there are interested buyers in the market today. However, with all of the negative publicity about the housing market, many home buyers were hesitant to buy because they worried that even lower prices might be offered later. Our "Deal of the Century" promotion gave potential home buyers the confidence they needed to make a long-term decision to purchase a home at an attractive value."

So, Ara, do you mean to tell me that next month or next year when housing prices are even lower, you will not reduce your inventory pricing to match the market? If you do (and we all know you will), then those "many home buyers were hesitant to buy because they worried that even lower prices might be offered later." are absolutely on the money. Maybe they were gossiping with the buyers of your inventory from LAST month... BTW, what's a "gross sale"??? I'm sorry, I just can't help myself. I just put a deposit down on a Hovnanian home, it will come with a free Benz, swimming pool, and 2% fixed rate mortgage. We didn't sign a contract yet, but I just know those terms will be in there. After all, they have to be. The home was already "gross sold" to me (I told you I couldn't stop, but I am going to try harder from now on:-) I should leave this guy alone, he doesn't live that far from me. I guess after I promised to try and stop, it would be too late to put in a mortgage joke, since Hovnanian deals with higher end homes that probably won't fit into a conforming loan.

""While our focus was on unsold homes that were completed or under construction, we also took some advance orders for homes where we are ready to begin construction. We typically maintain a conservative level of started, unsold homes in each community, and the weekend sales should result in one of the lowest company-wide inventory levels of unsold homes under construction in our recent history. All in all, the campaign was a huge success and we will be working hard to deliver these homes to our customers in the near future," Mr. Hovnanian concluded."

Yeah, but isn't much of your inventory problem due to land (about $300 million), and not just houses built on spec (that means speculatively built without a buyer lined up)? That is probably why you are able say that you should end up with the lowest level of unsold homes under construction in recent history. For one, that is not saying much since you had $3.5 BILLION in inventory as of July 31st and even if you really did close on all of those "Gross Sales", that would still only amount to about $800 million), but more importantly, you still have all of that land that you overpaid for with borrowed funds that you now have to move at any cost. So, of course you will take orders, any orders, to start building on that land because you really, really need to get rid of it. Can you make the same statement about total inventory being at the lowest level in history. Notice how I excluded recent history, because nearly any inventory level can qualify for that.

On that note, we know now how to value your inventory if these "gross sales" actually turn into real sales. We simply apply your total price mark down and additional marketing and administrative expenses, as well as the cost emanating from any special financing offered, and apply it to the whole of your current unsold inventory. Word through the grapevine is that you were providing $100,000 discounts on $500,000 houses, plus financing incentives. So let's call it $125,000 in discounts for the sake of simplicity, or 25%. Well, let's just give your $3.8 billion dollar inventory portfolio a 25% haircut, and voila, instant end to your book valuation problems, through clear, transparent, old fashioned marking to market. Ooops, you just lost a billion dollars in book value (and no telling how much in market value)!!! Are you sure you want to be making these bold press releases based on "Gross Sales"???

Finis, for now...

Last modified on Monday, 17 September 2007 05:00