Hovnanian, Meritage react to downturn in housing market

By Lisa Kerner

Charlotte, N.C., May 21 - Hovnanian Enterprises, Inc. and Meritage Homes Corp. continued to be affected by the downturn in the housing market, according to remarks made at the 6th Annual JMP Securities Research Conference on Monday.

"The housing market is going through a significant market correction," J. Larry Sorsby, Hovnanian's chief financial officer, said.

Sorsby said that while the used home market must still work through its overhang, the good news is that the housing industry is becoming much more disciplined and only building new homes when contracts are in hand.

Buyer psychology has shifted and continues to play a big role in the market, due in part to subprime news released in March, Sorsby noted.

Meritage Homes' chief executive officer Steven J. Hilton agreed that it's tougher to get past buyers' fear of getting stuck with a poor deal. Hilton said that unlike in the past, buyers are waiting to put their existing homes on the market until 60 days before their new house is completed. As a result, "We have to keep some spec homes on the ground," Hilton remarked, which Meritage doesn't like to do. "We are not a large spec home builder."

Hilton's company has been helped by a strong presence in Texas, where the market is more stable.

Meritage is battling the housing slump by intensifying sales with improved training, right-sizing the company, renegotiating land option contracts and managing costs by working more closely with suppliers.

Hovnanian's Sorsby said his company has had cut headcount by about 25% and has had "good success" renegotiating with its contractors. The industry remains fragmented from a supply chain point of view, Sorsby noted, which continues to be a problem.

Sorsby said his company expects to return to a positive cash flow by the second half of 2007 and into 2008.

Meritage was faced with writing its first impairments ever, but was encouraged by a decline in cancellations and net earnings of $0.57 per share. While the company had a weaker-than-expected second quarter, "We believe our strong balance sheet and risk profile position Meritage to weather downturns and capitalize on future opportunities the market provides," Hilton added.

Hovnanian Enterprises is a Red Bank, N.J.-based homebuilder.

Meritage is a homebuilder based in Scottsdale, Ariz.

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