Hovnanian Enterprises Inc (HOV)

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Hovnanian Enterprises, Inc. (HOV)

February 26, 2013 2:00 pm ET


J. Larry Sorsby - Chief Financial Officer, Executive Vice President and Director

Jeffrey T. O'Keefe - Director of Investor Relations


Susan Berliner - JP Morgan Chase & Co, Research Division


Susan Berliner - JP Morgan Chase & Co, Research Division

Hi, good afternoon, everyone. Hope you at least had some time to go outside and get some of the warmth outside but we we're very pleased to have Hovnanian here with us. It's Larry Sorsby, the CFO, who will do the presentation and then we'll open it up to Q&A. And Larry, up to you.

J. Larry Sorsby

Thanks, Sue, and thanks to JPMorgan for inviting us back again this year. Let's just start by what a difference a year makes. As Sue and I are reminiscing from a year ago to today, I think our bonds were up 50 points or so and the stock is up and the market for homes are up, and all is well with the world again. So it really has made a huge, huge difference. I'm going to -- our structure were really to say as little as possible in the presentation, leaving as much time as possible for Q&A. So I'm going to attempt to accomplish, maybe if I learn to push the right button. I can actually advance this.

Clearly, the U.S. housing market is in recovery. I'm going to just talk a few slides on our view of kind of where we are. And this shows U.S. housing starts since a little before World War II. You can see where the quintessential cyclical industry. What you see here by the red circles are the most recent peak, and then to the left of that, the 3 previews peaks. Not a whole lot difference in the cycle in that particular perspective.

If you look at the far right-hand bottom corner and see the circled in blue, that's the most recent trough. And then if you look at the 3 prior troughs, it is significantly different. 3 prior troughs, being about significantly better the current trough in about 50% worse than the previous 3 troughs. So we're in an unprecedented downturn. And if you ignore the last 3 years, I guess, the last 4 years now, and look at the what 2012 was, that by itself, would be the worst housing market in the last 70 years.

So in spite of this fact that the U.S. housing industry has been in a very nice recovery this past year and a very modest recovery, really, the previous couple of years to that. On a historical basis, we're still quite a bit lower than any other time in the last 7 decades. And that's with the background that population has grown from 132 million in the 1940s to about 310 million today.

So lots more upside than downside might even from where we are now. But the most interesting part of this slide to me is, as you look at the kind of green hashmarks that we've put here on a horizontal basis, that shows decade average demand on an annual basis. And although in particular years, we might have overproduced or underproduced on a decade, the decade basis, virtually all the decades around that 1.4 million to just under 1.5 million starts, other than the decade of the '70s when we had some subsidized housing, some other particular things that got us to 1.75 million.

So from our perspective, it's kind of like once we get above 1.4 million or 1.5 million in the future, maybe the lesson learned is that's a yellow blinking light in our face saying, be cautious about how aggressive you are on trying to grow in that kind of a scenario because there may be a downturn in the not too distant future. So we're a long ways from that at this point, but just one of the lessons that we think we've learned.

Also, what's been happening in terms of home prices. This is the Case-Shiller 20 city composite index. And it's up 6% since December of '11. I think the new one came out this morning, it was up, once again, as well. Now this is on existing homes and we're seeing similar things not quite to this extent on new homes, but prices are starting to rise. What's really been happening on a affordability perspective, hard to paint a better picture from a homebuilders' perspective from affordability. The higher this index is, the better. It means that homes are even more affordable. And the combination of home price declines that we saw during the downturn, combined with unprecedented historical low interest rates, have led to this very, very high affordability index.

What does that do for you? Well, people can buy more houses than they though they could when interest rates are in the 3s, than when there are in the low double digits, that's for sure. But today, they're loading up options just as they were in the bull market run. And this is one of the reasons, that they can actually afford it with the low interest rates and the lower prices than they there were in mid-2000.

Foreclosures, delinquency rates, not talked about quite as much as it was a year ago but they're still higher than the normal by quite a bit. The red line here represents total delinquency rates and they have been coming down on a macro trend basis but they're still not down to what you would call a normalized, being just under kind of 6%. And then as you look at foreclosure rates, we're finally starting to see a decline occur after a long time of it being pretty stable at a high rate. So as delinquency rates fall, you got to see foreclosures come down as well. They were delayed a bit because of judicial foreclosure states and robo-signing and a bunch of others stuff. But it's not really huge concern of most new homebuilders today.

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