Last quarter, Hovnanian enterprises posted weak results and reported a net loss causing its share price (HOV) to collapse. Three months later, the company appears to have recovered as it implements a strategic change, but warning signs remain.
Hovnanian Enterprises, the parent company of K. Hovnanian Homes, exceeded Wall Street expectations by reporting net income of $20.9 million in Q1 2026a welcome result for a builder that was still in the red a quarter earlier.
The improved performance comes as the company shifts from entry-level homes to a higher-margin product. Anecdotally, the builder also reported stronger demand in the second half of the quarter.
However, there are still reasons for concern that point to a challenging homebuilding market. Sticking to a pace-over-price philosophy, K. Hovnanian relied on increased incentives to clear inventories, pushing homebuilding gross profit margins to 13.4%, down 490 basis points from a year earlier.
“The comparison is difficult, especially since we offered even greater incentives this year to maintain sales pace, which accounted for much of the year-over-year profit decline. Additionally, deliveries were lower due to slower market conditions,” Hovnanian Enterprises CEO Ara K. Hovnanian said during an earnings call Wednesday.
To turn things around, K. Hovnanian is selling through low-margin entry-level inventory and shifting to a higher-margin product mix. Executives expect this change in strategy to boost profits and margins in the second half of the year, but in the current environment nothing is certain.
Feeding the machine: a specification, incentives and quick formula
While many builders are deliberately reducing their spec numbers, K. Hovnanian has consciously chosen to maintain an increased number of spec homes to support his pace-over-price strategy. By focusing on specifications and selling them before construction is complete, K. Hovnanian can also sign and deliver more contracts within the same quarter.
“This approach means we have fewer homes in backlog at the end of each quarter, but we can turn the backlog into completion more quickly. In the first quarter of 2026, 41% of the homes we delivered were both sold and closed within the same quarter, the highest percentage we’ve recorded since we started tracking this metric in 2023,” Hovnanian said.
K. Hovnanian has the fourth highest share of lots managed through options at 86%, and the second highest inventory turnover rate among comparable residential construction companies.
“This is an important part of our strategy as it means we are selling and replacing our inventory faster than most competitors, demonstrating a more efficient use of our capital. This reflects many other factors in addition to land light. We see more opportunities to leverage land options, as well as reducing cycle times from lot acquisition to start of construction and start of construction to completion, which would further help us improve our inventory turnover,” said Brad O’Connor, CFO at Hovnanian Enterprises.
Despite a strong sales pace, the share of specs has fallen consecutively in each of the last four quarters, from a peak of 79% to 71% last quarter. This is important because the margins to be built were approximately 780 basis points higher last quarter. However, this was not an intentional strategy, but rather a symptom of market trends.
“That wasn’t actually part of a conscious strategy to do that. It just so happens that part of our offering. We often offer both QMIs and to-be builds, and it just so happens that the demand for to-be builds in our markets has been growing recently.
Incentives, which now make up 12.6% of the average sales price, are starting to level off, but are still about 290 basis points higher than a year ago. When asked by an analyst whether K. Hovnanian plans to scale back incentives in exchange for higher margins and a slower pace, Hovnanian reaffirmed his commitment to his current strategy.
“Some of our peers have clearly made the decision to offer less incentives and pursue higher gross margins, even with the slower volume that usually translates. In our case, we prefer to focus on pace versus price. We will maintain the incentives,” he explains.
Sales via lots with a low margin and a rotating mix
A philosophy of pace over price is central to K. Hovnanian’s operational thesis. But to understand why this strategy makes sense for the New Jersey-based builder in the here and now, it’s important to take a closer look at their lot positions.
Many of the homes K. Hovnanian is currently selling are low-margin starter homes in peripheral submarkets. While these properties are more affordable, they are exactly the type that require high incentives and price reductions, which hurts margins. As a result, K. Hovnanian decided to change his strategy.
“We have shifted our focus on new land acquisition from lower-margin starter homes on the periphery to more new-build homes in the A and B locations, as well as targeting more active adult communities,” Hovnanian explains.
For the first half of fiscal 2026, K. Hovnanian is focused on selling quickly through lower-margin inventory, even if that means sacrificing some price and margin. The builder predicts that by the second half of the year, higher-margin inventory will dominate deliveries, which could boost margins and profitability.
“Our strategy, which puts pressure on margins in the near term, allows us to free up older lots with lower margins and position us for better profitability as newer communities come online, communities that were already underwritten with today’s higher incentives in mind,” Hovnanian said.
K. Hovnanian, which operates in 13 states, primarily in the Mid-Atlantic and Sun Belt, but also in California, Illinois and Ohio, saw some of its strongest performance in the Mid-Atlantic. Hovnanian specifically pointed to Delaware, Maryland, New Jersey, Virginia, West Virginia and South Carolina as stronger states with a disproportionate number of communities experiencing price increases.
First signs of a comeback?
Some public construction companies have reported larger-than-expected increases in demand and traffic since mid-December, an increase that dwarfs typical seasonal patterns. Many homebuilders at the International Builders’ Show last week also noted similar trends, even as the underlying data still shows relatively weak demand.
Although K. Hovnanian does not expect a peak in demand or a substantial improvement in market conditions for the rest of the year, managers did report some positive signs.
The number of builder specifications fell as demand for built-to-order homes increased. While demand in November and December was lower than the same period in 2024, the builder’s sales pace improved in January 2026 compared to a year ago, and that trend continued in the first few weeks of February.
This provides a glimmer of hope that the spring selling season could be relatively strong and suggests the homebuilding market has bottomed out. However, it is uncertain whether this trend will continue as weak consumer confidence, economic uncertainty and affordability constraints persist.
Agility and agility are important
K. Hovnanian’s fourth-quarter 2025 net loss and improved, albeit subdued, first-quarter performance underscore the importance of responding to market pressures. By focusing more on emerging buyers and active adult communities in attractive areas, the builder believes it can keep sales strong without relying so heavily on discounts and incentives.
Executives believe margins will improve as this more desirable inventory will make up a larger portion of total inventory in coming quarters, but the long-term outcome of this strategy remains to be seen.
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