Hovnanian Enterprises’ latest earnings call held on Thursday revealed a builder trying to course-correct after posting a net quarterly loss.
Executives acknowledged the grim realities of the firm’s fourth-quarter operating and financial performance. Still, they also laid out several reasons they expect the just-completed period to be a one-time blip in an otherwise strong run ahead.
Wall Street does not like surprises, and this performance qualifies as one. The parent company of K. Hovnanian Homes — taking a big hit as a result of falling short of analysts’ expectations — saw its stock (HOV) tumble by 22.51% on Thursday after the firm reported a net quarterly loss of $667,000 in Q4 of 2025. The news is a potential warning sign for other homebuilders navigating a challenging market where buyers and margins are both stretched thin.
“The year-over-year comparisons are challenging, to say the least, in almost all metrics, given that 2024 was an excellent year for us, and the environment became much, much more challenging in 2025,” CEO Ara Hovnanian said on the earnings call.
Amid these tensions, K. Hovnanian is holding steady in its overarching strategy of pace over price. In doing so, the builder is taking a page out of Lennar’s “even-flow” playbook and leaning into a volume-first approach akin to that of Smith Douglas Homes.
This approach has its drawbacks — K. Hovnanian’s adjusted gross profit margin is down to 16.3%, down from 21.7% a year ago, amidst an environment of stagnating prices and generous incentives. However, maintaining volume and market share is central to the company’s operating thesis, said CFO Brad O’Connor.
“We have the second-highest inventory turnover rate among our peers. This is an important part of our strategy because it means we sell and replace our inventory more quickly 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 year 2026 and win back the confidence of Wall Street analysts and their clients. The builder’s gross profit margin is expected to bottom out next quarter, while increasing exponentially throughout the year. Here’s how executives plan to make this forecast a reality.
Moving through low-margin lots and shifting to a land-light model
K. Hovnanian is relying on a volume-heavy strategy to cycle through low-margin lots acquired in 2023 or earlier. This is an issue weighing down the builder’s margins. Those vintage lots were underwritten when K. Hovnanian offered much lower incentives. Therefore, these lots are delivering slim margins amid today’s difficult market environment.
The builder is leaning even more heavily into its high-pace strategy to move through these lots quickly. Lots acquired more recently, in 2024 and 2025, are expected to provide better returns, generating higher returns across a larger percentage of deliveries in the quarters ahead. This is a positive sign.
“Our focus on pace over price and our short-term strategy to move through lower margin lots are laying the foundation for stronger performance when the market stabilizes and as we open communities with our newer land acquisitions that factored in higher incentives while still achieving normal return metrics,” Hovnanian said.
There is also a clear shift to a land-light model. Executives report that 85% of K. Hovnanian’s lots are controlled via option, up from 45% in fiscal 2015. The builder can leverage this to its advantage, at least in some cases.
“In today’s challenging market, we’re also working with some land sellers who we have option agreements with to buy mutually beneficial solutions where we both share a little bit of the pain in a difficult market. Strategically, we decided to sell through lower margin lots 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 is maintaining a high inventory of spec homes, which the builder refers to as quick move-in homes (QMIs). Spec homes accounted for 73% of sales in the last quarter, well above the historical range of roughly 40%.
However, spec homes have declined as the overall percentage of sales over the last three quarters.
This spec-heavy approach has led to the company’s first-ever backlog conversion ratio of more than 100%, meaning they delivered and received revenue on more homes than were included in their beginning backlog for that quarter.
A spec-heavy approach has downsides: those 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 pave the way for success in 2026.
“By focusing on pace over price, maintaining a higher inventory of quick-moving homes, we’re able to sign and deliver more contracts each quarter, convert backlog at a higher rate, and keep our communities active and burn through our older land that has lower embedded margins. This clears our balance sheet for newer land acquisitions, underwritten to provide solid returns even with the current high incentives,” Hovnanian explained.
Shifting buyer segments and regional emphasis
The entry-level buyer segment is the most strained, as younger Americans and the middle class are increasingly struggling to make ends meet and afford homeownership. As a result, K. Hovnanian, similar to Beazer Homes, seems to be shifting away from this strained segment in search of higher margins.
“I can look back and say we were too heavily invested in the more affordable tertiary markets with entry-level homes. This has been the more challenging segment of the housing market, and we have been staying clear of these locations in our new land acquisitions,” Hovnanian said.
The firm, like PulteGroup, is emphasizing the active adult segment as more Americans age into 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 is now also shifted to geographic areas of strength. The northeast typically has less new inventory and offers better returns, while many southern markets have a glut of new homes that require higher incentives or price reductions to sell.
“Our land position is heavily weighted to the Northeast, which is over 53% of our lots controlled, and that’s important because the Northeast is one of our most profitable segments. It is lowest in the Southeast, a more challenging market at the moment, where we only control 17% of our total lots,” Hovnanian explained.
SG&A remains high, but there are other cost-cutting measures available
SG&A costs are relatively high and are expected to be between 13.5% and 14.5% of total revenue next quarter. These costs could remain high, but executives framed this spending as an investment in future efficiency.
“One of the reasons the SG&A ratio is running a little high is that we are expecting community account growth, and we have to make new hires in advance of those communities. In addition, we are making significant investments to improve processes and technology in many areas to significantly increase our efficiency in future years,” O’Connor explained.
Executives pointed to a couple of ways to reduce costs, as SG&A spending is expected to remain elevated in the near term. One of these is re-bidding with suppliers and trade partners for more favorable contracts, as many builders have done recently.
Another way would be to replicate a strategy of buying down a 7-year ARM rather than a 30-year fixed-rate mortgage. According to Hovnanian, several peer companies have had success on that front.
“That has two benefits. One, you can qualify buyers at a lower rate and at the same time actually save cost, which helps margins. So we’re going to begin advertising and promoting that program more aggressively starting this weekend. And if it’s as successful as we’re seeing, that incremental portion of our buyers that use a seven-year ARM will help our margins,” he said.
Key Takeaways
Hovnanian Enterprises didn’t perform well last quarter. The company’s revenue of $817.9 million slightly beat out Wall Street expectations but was down strongly from $979.6 million a year prior.
K. Hovnanian’s net loss and declining revenues are a warning call for builders across the country. However, there are at least a few insights that builders from across the country can take from the company’s earnings call.
- Hovnanian’s shift to a land-light follows a broader asset-light industry trend reshaping homebuilding.
- Large builders may increasingly turn to buying down a seven-year ARM versus a 30-year fixed-rate mortgage to pad their margins.
- Improved efficiency can come at an upfront cost. Hovnanian’s SG&A expenses remain elevated, partially because of investments to improve processes and technology. While this is weighing them down in the short term, executives are betting that these investments will pay off in the long run.
- The entry-level market is strained. Yes, this may sound obvious to anyone in homebuilding. But K. Hovnanian’s apparent shift away from the more affordable markets and enhanced emphasis on active-adult communities is a sign of where demand in the market is heading.
For now, K. Hovnanian is betting that its shifting strategy can help the company weather the storm for the next quarter until a forecasted resurgence deeper into next year. Only time will tell how that strategy will play out.
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