Hovnanian aims for a course correction as stock prices fall and profits fall

Hovnanian enterprisesThe latest earnings call on Thursday showed a builder trying to correct course after posting a net quarterly loss.

Executives acknowledged the grim reality of the company’s fourth-quarter operating and financial performance. Yet they also laid out several reasons why they expect the just-completed period to be a one-time interruption in an otherwise strong period ahead.

Wall Street doesn’t like surprises, and this performance qualifies as such. The parent company of K. Hovnanian Homes – which took a major hit for failing to meet analyst expectations – saw its shares (HOV) plunge 22.51% on Thursday after the company reported a net quarterly loss of $667,000 in the fourth quarter of 2025. The news is a potential warning sign for other homebuilders entering a challenging market where both buyers and margins are tight.

“The year-over-year comparisons are challenging, to say the least, in almost every respect, as 2024 was an excellent year for us and the environment became much, much more challenging in 2025,” CEO Ara Hovnanian said during the earnings call.

Amid these tensions, K. Hovnanian remains steadfast in his overarching strategy of pace over price. In doing so, the builder is taking a page from Lennar’s even-flow playbook and leaning on a volume-first approach similar to that of Smith Douglas Homes.

This approach has its drawbacks: K. Hovnanian’s adjusted gross profit margin has fallen to 16.3%, compared to 21.7% a year ago, in an environment of stagnant prices and generous incentives. However, maintaining volume and market share is central to the company’s operations, according to CFO Brad O’Connor.

“We have the second-highest inventory turnover rate among our peers. This is an important part of our strategy as it means we sell and replace our inventory faster than most competitors, demonstrating a more efficient use of our capital.”

Company executives believe this blueprint could enable them to return stronger in the second half of fiscal 2026 and regain the trust of Wall Street analysts and their clients. The builder’s gross profit margin is expected to bottom next quarter while rising exponentially throughout the year. Here’s how executives plan to make this prediction a reality.

We are going through low margin lots and moving to a land-light model

K. Hovnanian is relying on a high-volume strategy to process the low-margin lots acquired in 2023 or earlier. This is an issue that puts pressure on builders’ margins. Those vintage lots were underwritten when K. Hovnanian was offering much lower premiums. Therefore, these lots provide small margins in the current difficult market environment.

The builder is leaning even more heavily on his fast strategy to move quickly through these lots. The lots purchased more recently, in 2024 and 2025, are expected to provide better returns and generate higher returns for a greater percentage of deliveries in the coming quarters. This is a positive sign.

“Our focus on pace over price and our short-term strategy to cycle through lower-margin lots lay the foundation for stronger performance as the market stabilizes and as we open up communities with our newer land acquisitions that take into account higher incentives while still achieving normal rates of return,” Hovnanian said.

There is also a clear shift towards a land-light model. Executives report that 85% of K. Hovnanian’s lots are managed through options, up from 45% in fiscal 2015. The builder can use this to his advantage, at least in some cases.

“In today’s challenging market, we are also working with a number of land sellers with whom we have option agreements to purchase mutually beneficial solutions where we both share a little of the pain in a difficult market. Strategically, we have decided to sell lower margin parcels to make room for new land acquisitions that meet our IRR (Internal Rate of Return) targets,” O’Connor explained.

Maintaining a high inventory of spec homes to drive sales

K. Hovnanian maintains a high inventory of specialty homes, which the builder calls quick entry homes (QMIs). Spec homes accounted for 73% of sales last quarter, well above the historical range of about 40%.

However, the overall percentage of sales over the past three quarters has declined.

This spec-heavy approach has led to the company’s first-ever backlog conversion rate of over 100%, meaning they delivered and received revenue on more homes than were included in their initial backlog for that quarter.

A spec-heavy approach has drawbacks: These homes typically require more incentives to sell and don’t offer the benefit of custom upgrades. However, executives noted that this strategy is the best way to maintain a high sales pace and set the stage for success in 2026.

“By focusing on pace over price, by maintaining a higher inventory of fast-moving homes, we are able to sign and deliver more contracts each quarter, convert backlogs at a higher pace, and keep our communities active and burning our older land with lower embedded margins. This frees up our balance sheet for newer land acquisitions, assured to provide solid returns even with current high incentives,” Hovnanian explained.

Shifting buyer segments and regional emphasis

The entry-level buyer segment is the most stressed, as younger and middle-class Americans increasingly struggle to make ends meet and afford home ownership. As a result, K. Hovnanian, like Beazer Homes, appears to be exiting this tense segment in search of higher margins.

“I can look back and say that we have overinvested in the more affordable tertiary markets with starter homes. This has been the more challenging segment of the housing market and we have steered clear of these locations in our new land acquisitions,” Hovnanian said.

The company, like PulteGroup, is emphasizing the active adult segment as more Americans enter retirement. That segment, which is less price and interest rate sensitive, accounts for 19% of K. Hovnanian’s business and has generally performed well.

K. Hovnanian’s emphasis now also shifts to geographical strengths. The Northeast typically has less new inventory and offers better returns, while many southern markets have an abundance of new homes that require higher incentives or price reductions to sell.

“Our land position is heavily weighted in the Northeast, where more than 53% of our plots are controlled, and that is important because the Northeast is one of our most profitable segments. The position is lowest in the Southeast, a more challenging market at the moment, where we control only 17% of our total plots,” Hovnanian explains.

SG&A costs remain high, but other cost-saving measures are available

SG&A costs are relatively high and are expected to amount to between 13.5% and 14.5% of total revenue next quarter. These costs may remain high, but executives view these expenses as an investment in future efficiency.

“One of the reasons the SG&A ratio is a bit high is that we expect to see growth in community accounts, and we need to hire ahead of those communities. Additionally, we are making significant investments to improve processes and technology in many areas to significantly increase our efficiency in the coming years,” O’Connor explains.

Executives pointed to a number of ways to reduce costs as SG&A expenses are expected to remain high in the near term. One of these is to re-bid suppliers and trading partners for more favorable contracts, as many builders have done recently.

Another way would be to follow a strategy of purchasing a seven-year ARM instead of a thirty-year fixed rate mortgage. According to Hovnanian, several similar companies have achieved success in this area.

“That has two benefits. One, you can qualify buyers at a lower rate and at the same time actually save costs, which helps margins. So we’re going to start advertising and promoting that program more aggressively starting this weekend. And if it’s as successful as we see, that increasing share of our buyers using a seven-year ARM will help our margins,” he said.

Key Takeaways

Hovnanian Enterprises did not perform well last quarter. The company’s revenue of $817.9 million slightly exceeded Wall Street expectations, but was down sharply from $979.6 million a year earlier.

K. Hovnanian’s net loss and declining revenues are a warning to builders across the country. However, there are at least a few insights that builders across the country can glean from the company’s earnings call.

• Hovnanian’s shift to land-light follows a broader trend in the asset-light industry that is reshaping homebuilding.
• Large builders could increasingly opt for a seven-year ARM instead of a 30-year fixed-rate mortgage to increase their margins.
• Improved efficiency can come at a cost. Hovnanian’s SG&A costs remain high, partly due to investments to improve processes and technology. Although this is a heavy burden for them in the short term, managers are betting that these investments will pay off in the long term.
• The entry-level market is under pressure. Yes, this may sound obvious to anyone who works in home construction. But K. Hovnanian’s apparent shift away from more affordable markets and greater emphasis on active adult communities are a sign of where market demand is heading.

For now, K. Hovnanian is betting that his evolving strategy can help the company weather the storm for next quarter, until a predicted rebound deeper into next year. Only time will tell how that strategy will play out.

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