Hovnanian's Fire Sale Burns Other Builders

Don't buy the hype.

Hovnanian Enterprises'(HOV:NYSE) three-day fire sale over the weekend was billed as the "deal of the century," but it may just spark a pricing war among all homebuilders -- which is bad news for the entire industry.

The sales are a positive for Hovnanian in that it could increase immediate cash flow and allow the company to burn off inventories.

The real question, however, is whether Hovnanian's slashed prices actually got buyers off the sidelines and increased overall demand for homes in the U.S. Instead, perhaps the company simply stole some short-term market share from the shallow demand pool.

Hovnanian said Monday that it recorded more than 2,100 gross sales over the weekend -- 1,700 of which were contracts and 400 were sales deposits. In comparison, the company recorded just 3,906 gross orders for its entire third quarter, which ended July 31.

The company, however, didn't provide the average price of its sales. On the builder's Web site over the weekend, the price cuts ranged from about $10,000 to $150,000 for individual homes in different markets. Thus, it's hard to tell the average price for sales contracts written over the weekend.

The speculation among some housing analysts is that other public homebuilders could now respond by cutting prices further to regain market share lost to Hovnanian over the weekend. That would contribute to a downward spiral in prices and increase buyers' hesitancy as they wait for the next big sale.

The other issue remains how much this campaign will really help Hovnanian. The builder had been advertising the temporary "deal of the century" campaign for weeks. That means many prospective buyers likely were waiting for the sale, so Hovnanian could have simply received several weeks' worth of orders in one weekend.

As well, Hovnanian could now be facing a situation similar to the one at Apple(AAPL:Nasdaq), which faced buyer backlash after drastically cutting prices on its iPhone only two months after its launch.

Imagine having bought a home a month ago and now seeing these price cuts. The fear is that this campaign may raise Hovnanian's cancellation rate. At the end of the day, a surge in gross orders means little if cancellations also jump.

"If a buyer is in their backlog currently, he is not going to be happy with this," says one homebuilding analyst who follows the company.

Of course, if you listen to Ara Hovnanian, the company's chief executive, the sales promotion exceeded expectations.

"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," he said in a statement Monday. "However, with all of the negative publicity about the housing market, many homebuyers were hesitant to buy because they worried that even lower prices might be offered later."

This last sentence is particularly intriguing, since Hovnanian's campaign may have just forced the entire country to the sidelines waiting for the next builder fire sale.


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