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Hovnanian Enterprises, Inc. (HOV)
Citi 2012 North American Credit Conference Call
November 14, 2012 10:50 am ET
J. Larry Sorsby – Executive Vice President & Chief Financial Officer
Previous Statements by HOV
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We certainly believe that the housing markets recent overall strength and significant improved sales pace. This year indicates if the market for new homes has bounced off the bottom and is already in a period of recovery, I don’t think there is any question that the homebuilding industry is finally in a period of recovery after the worst downturn the industry has ever seen.
That’s kind of evidenced on this slide; you could see here U.S. housing starts since kind of the struggle for World War II. And what’s interesting as you look across this as we’ve circled in red kind of the recent troughs, that’s been the most recent trough that’s gives me peak and compared to previous peaks very similar. No real difference there. As you look at the troughs that we saw in the 70s, 80s and 90s, they were a little more than a million starts per year. The trough this time dramatically different at about 500,000, twice as bad then what we’ve seen before. And then we had a couple of years a very modest recoveries really relatively flat $520,000, $550,000 kind of starts a year again, the worst kind of trough that we had ever seen. And this year seasonally adjusted about $872,000 starts per year to brought per share. It feels wonderful but to put it in perspective to ignore the previous three years, this year was wonderful year that everyone is really excited about. Certainly, we’re excited about and we’re seeing a lot of benefits from is the worst year in housing in the last 70 years.
That’s really what I want to put in perspective. We got a lot more upside and downside at this point with the very early stages of the recovery. We’re still in a pretty horrible housing market in spite of the fact that it’s dramatically better than it’s been the last three years and our results certainly reflect that. So you’re going to continue to see when did the back of this industry for sometime. Again put it in a historical perspective as you look at these green hash marked here on horizontal basis about $1.4 million starts every decade for the past six, seven decades other than in the 70s that was actually $1.75 million, even in the most recent decade $1.43 million starts.
So if we did overbuild in the first half of the last 10 years would certainly we probably did. We’ve more than under built and the last half of the decade were on average were kind at the same level we’ve been and to keep that in perspective 70 years ago, 132 million U.S. population today 308 million U.S. population. So this industry is not going away and is going to grow, the experts are saying that we should have $1.6 million to $1.9 million starts each year for the next 10 years.
We don’t necessarily subscribe to the experts numbers. We’d be happy if we just went from 370,000 up to million or 1.1 million something like that. Ultimately, we’re going to get back to that 1.4 million kind of average. We think a modest recovery because we don’t think the infrastructure is in place in this industry to gear backup from a labor perspective to do a rocket ship kind of recovery, we think would not be sustainable for the industry.
So we actually like the idea of a little more modest kind of pace to the recovery. What’s been happening in terms of affordability, one of the things that certainly in pacing people out of the rental market and into the home buying market is the affordability. That this slide shows as an index of affordability, basically medium place of home and the medium income and higher is better and it’s the highest it’s ever been that 185 kind of number. The combination of lower home prices and this downturn combined with historically low interest rates make homeownership extremely affordable.
So that’s really good and people are recognizing that. And building kind of with their pocketbook, everybody wants to know what’s going on with foreclosures and delinquencies, the red line here is the delinquency rates. And you can see for the last few years the trend has been down on delinquency rates, ultimately that will lead to a downturn in the foreclosure rate, which is the gray line here, which has been relatively stable for the past several years. We certainly don’t expect it to increase. We expect overtime to see a decrease because delinquencies have been declining, the reasons have been stable is the global signing, the judicial foreclosure state that just delayed being able to be foreclosures. But we do not see this as an increasing problem and we think it’s a decreasing issue for the industry.