Lower mortgage rates help Hovnanian reduce its net loss

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Falling interest rates contributed to efforts that helped Hovnanian Enterprises nearly halve its net loss during its fiscal first quarter, when it maintained a strong sales pace by selling more low-priced homes.

The builder's net loss fell to more than $17 million from almost $31 million a year ago during the three-month period.

"While we're not satisfied with the loss in the quarter, the substantial improvement over last year gives us confidence in our 2019 full year's performance," Ara Hovnanian, the company's chairman, president and CEO, noted in its earnings call.

The company's metrics for the trailing 12-month period are strong, he noted. Peer group studies show Hovnanian Enterprises has the second highest inventory turnover rate for that period, behind only NVR.

Sales during the quarter were mixed, but ultimately strong.

"The quarter clearly began with a very weak November compared to last year. We reported that during our year-end call," Hovnanian noted. "Fortunately, you can also see that December and January reversed that trend with contracts per community similar to last year."

The builder attributed improvement in its performance later in the quarter in part to a drop in mortgage rates to 4.35% by February from near 5% in the latter part of last year. Home cancellation rates, which previously peaked at 26% in November, responded by dropping to 18% in February.

"We believe that as mortgage rates rose last year, it caused our cancellation rate to increase as some of our customers were unable to sell their existing homes," Hovnanian said in the call.

Sales at the builder increased to 3.4 contracts per community in February from 3.3 a year ago. The absolute number of contracts rose to 528 from 503 during the same period.

There was more demand for affordable homes than for higher-end housing during the quarter, and the company made changes to its product line to address this, Hovnanian noted during the call.

"We've been shifting our mix slightly to lower price points," he said.

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