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No. 2 - Hovnanian On Homebuilder Jitters

On Friday, we reached the end of what's been a wild week for the homebuilders. The sector is weathering rumors of a major bankruptcy and growing concern that the mortgage-market fallout is spreading beyond subprime to less risky loans.

One of the embattled companies is Hovnanian Enterprises (HOV). Its stock fell as much as 16% on Wednesday, and is down over 65% in the past 6 months.

After such major declines, the big question remains: is it safe for you to buy a home and is it safe for you to bottom fish these stocks?

No better person to ask than Ara Hovnanian, CEO of Hovnanian Enterprises who joins the guys for this conversation. Here are excerpts of what was said.

What happened this week?

“There’s just a lot of nervousness in the market. Everyone is worried about the credit market,” says Hovnanian. “There were rumors about Beazer (going bankrupt). It’s just a very jittery marketplace.”

Do you see more financial distress today than 2 or 3 months ago?

“Psychological distress, I think is really more of the problem,” replies Hovnanian. “There’s distress on the very bottom end of the credit market for mortgage consumers – but the “regular” mortgages are really unaffected and that’s the majority of the market,” explains Hovnanian.

How do you interpret the market?

“It’s the herd mentality,” says Hovnanian. “The bizarre thing on the home sale front is fundamentals are good. There’s still a positive economy, job growth, and rates by historical measures…. are near historical lows. It’s a psychology issue right now.”

How can you operate your business and stay solvent in this market?

“We’ve been around for 50 years… and we’ve been through a few of these,” says Hovnanian. “It’s the same old game.. you cut overhead and keep trim. You focus on the balance sheet and sell houses.. you can’t stand still and hold onto houses.”

He adds “We are marking to market. The whole industry has and that just makes it easier to reduce inventory.”

You've been concentrating on Florida and California. Is that a problem?

“I’d say it’s bothersome but not worrisome,” answers Hovnanian. “California and Florida were great on the way up. You could make a lot in those markets. But clearly they were oversold and it‘s really correcting and it’s painful. But as long as we keep a capital structure that can weather the storm… we’ll be fine.”

Do you think a homebuilder will file for bankruptcy?

“I suppose anything is possible,” replies Hovnanian. “But the group in general… is far better capitalized now, than they were in 1991 which was the last major slowdown.”

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