Ara Hovnanian, CEO of Hovnanian Enterprises

This is a partial transcript from Your World with Neil Cavuto, September 3, 2003, that was edited for clarity. Click here for complete access to all of Neil Cavuto's CEO interviews.

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NEIL CAVUTO, HOST: Well, another stock flying high lately. That is Hovnanian Enterprises.

The home builder turning in record earnings after its profit report after the bell. Profits soaring 76 percent in the latest quarter, easily beating Street estimates. Revenues climbing about 20 percent. The stock has more than doubled since the start of the year. It was up nearly 4 percent today.

But will rising mortgage rates put a damper on demand this fall? Let’s ask Ara Hovnanian. He is the president and the CEO of Hovnanian Enterprises.

Ara, good to have you. Thanks for coming.


CAVUTO: Wow. On all cylinders. What happened?

HOVNANIAN: Well, we’ve been saying it for a while. Everybody’s been concerned for a long time, but there is just a tremendous amount of housing demand. It’s not a fictitious thing. It’s driven by demographic science, immigration, actuarial science. It’s strong and steady out there.

CAVUTO: Still, mortgage applications in the latest week dropped 1.6 percent. Maybe this backup in rates is beginning to be a choking point?

HOVNANIAN: You know, we are about to release August sales tomorrow morning. Since the market closed, I can tell you our August sales were up about 40 percent compared to last year, and we just had 125-basis-point increase in long-term mortgage rates.

You know, the rates are at phenomenal levels. Frankly, I’d be comfortable with another 100-basis-point increase in mortgage rates and...

CAVUTO: But how much of that is people getting skittish, jumping off the fence, and then how much is it limited by a backup?

HOVNANIAN: That certainly is something we hear all the time and a question we hear. There’s a great theory that as soon as rates start to tweak up a little bit, people are going to jump in and buy right then. We just have not seen that historically. It’s just been a very steady market.

CAVUTO: All right. Now what is the strongest market for you in this country?

HOVNANIAN: We’re very lucky. We happen to be in a handful of highly regulated markets that really restrict supply, and those are the strongest ones -- Southern California, Northern California, the entire Washington, D.C., suburbs, Virginia, and Maryland.

CAVUTO: We should stress. You know this industry very well, but when you’re restricting supply, obviously, demand is the factor, and that’s what’s guiding prices up.

HOVNANIAN: Absolutely. Demand has been very steady, supply is restricted, and it’s economics 101.

CAVUTO: You know, there’s this feeling now that, with the housing stocks beginning to move and percolate, once again, that maybe there’s going to be a combination. We saw it in the late ‘80s after the house downdraft there, that the key players came together.

Do you see or envision that? You’ve bought a few players of your own, particularly in the Houston area. Do you envision going beyond that?

HOVNANIAN: You know, that certainly is a possibility. Right now, we’ve done four acquisitions in the last year of companies. We find better opportunities.

CAVUTO: Financed just by the high stock, right?

HOVNANIAN: Well, most of them we paid for cash, and we’re projected to earn about $250 million this year.

CAVUTO: So you don’t think you’re getting in too deep or spreading yourself too thin?

HOVNANIAN: Not at all. We’re managing a 1-to-1 debt-to- equity ratio, and we use that as our key guide to how much we can spend. This year, we’ll end with about $800 million of equity. The year we’re about to begin in 60 days, we’ll end with $1.1 billion in equity. We’ve got a solid financial base, the best we’ve ever had.

CAVUTO: Where is the base the strongest? I know now you’ve cut across a broad swathe of folks of all income ranges. Would you say on the high end you’re having more protection, or is it everyone?

HOVNANIAN: You know, I’d say it’s pretty equally distributed. If anything, over the last six months, the high end has been just a little bit softer, but that’s start to bounce back just in the last month or two as well.

CAVUTO: Do you ever worry -- and this happened with Toll to a degree -- that you overbuild and the quality issue gets to be an issue?

HOVNANIAN: No. We always worry about everything, and quality is something we’re very focused on as a company. No doubt about it. But, you know, we build one house at a time.

We’ve got management that is decentralized that oversees it. Our management up and down the ranks is compensated by customer satisfaction. So they are focused very much on quality.

CAVUTO: Is there such a thing, Ara, as a threshold level? Is it an 8-percent 30-year bond, is it an 8-1/2-percent 30-year bond, at which point you say, all right, this is not...

HOVNANIAN: You know, Neil, in the year 2000, which was an awfully darned good housing year not long ago, mortgages averaged 8-1/2 percent for most of the year.

CAVUTO: That’s very true. That’s very true.

HOVNANIAN: That was recent history.

CAVUTO: People forget we’re now at 35-year lows rather than 45-year lows.

HOVNANIAN: Yes. That’s right. So, you know, will that have some affect in change? Yes. I think what might happen is, instead of buying the 3,500-square-foot house with the really fancy elevation and the granite countertop, maybe they’ll buy a 3,200-square-foot house and...

CAVUTO: Or they might go on adjustable rate.

HOVNANIAN: Or an adjustable rate. Absolutely.

CAVUTO: Have you seen that from your own financing?

HOVNANIAN: You know, generally speaking, historically, we’ve absolutely seen it. Every time we have a slight rise in long-term rates, the percentage of adjustable-rate-mortgage business that our mortgage company writes goes up. There is no two ways about it. And that’s a great phenomena. We didn’t have that in the ‘70s. That really helps smooth out cycles right now.

The key thing: Household growth is the engine. That’s what determines our long-term demand. Nobody disagrees with household growth for this next decade. It’s going to be fabulous and steady. A million-five housing units a year is a shoe-in on average for this decade.

CAVUTO: Ara Hovnanian of Hovnanian Enterprises.

Good seeing you again.

HOVNANIAN: Good to see you again.

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