More Economic Bad News For Overburdened, Over-Taxed New Jerseyians ...
Red Bank-based home builder, Hovnanian Enterprises, the nation's eighth-largest U.S. home builder, describes rising inventories of unsold homes as "the steepest decline in new-home sales in our memory."
Housing Slide Prompts Hovanian To Cut Jobs
Saturday, October 07, 2006
Faced with rising inventories of unsold homes, Hovnanian Enterprises said it plans to ax executive and field jobs to improve its bottom line and weather what the Red Bank-based home builder describes as "the steepest decline in new-home sales in our memory."
In an internal memo to employees dated Oct. 3, Chief Executive Ara K. Hovnanian said an unspecified number of staff reductions were necessary in order "to remain healthy," as the nation's eighth-largest U.S. home builder grapples with the broad downturn plaguing its industry.
"In many locations, including corporate headquarters, we have been forced to face the fact that we no longer have enough work for all of our Associates," Hovnanian wrote. "We consider this action to be a last resort, but business realities demand action in order for our company to remain healthy and to maximize our performance in a difficult market environment."
News of Hovnanian's job cuts comes one day after East Brunswick-based Kara Homes, one of the state's largest private home builders of condominiums and active adult communities, filed for protection from creditors under Chapter 11. A company in Chapter 11 is protected from creditors while it reorganizes and tries to work out a plan to pay its debts.
The filing ended weeks of speculation about the developer's financial health. Kara Homes bankruptcy attorney David Bruck blamed the builder's financial meltdown on "slowing sales ... brought about by a slowing economy."
Papers filed with the bankruptcy court show Kara Homes listed $350 million in assets -- primarily its interest in the various housing developments it is pursuing around the state -- and nearly $297 million in liabilities. That includes $248 million in construction loans from banks, including Old Bridge-based Amboy National Bank, one of its largest lenders, with $58.2 million.
"The company ran out of cash," said Bruck, adding Kara Homes plans to reorganize by completing its homes under contract and selling some additional properties.
Homebuilders have been warning investors and consumers since late 2005 that the red-hot housing market is starting to cool down. The Commerce Department reported last month housing starts dropped 6 percent in August from a month earlier, and new home sales are down 21 percent from a year ago.
Hovnanian already had cut its profit targets for the remainder of fiscal 2006, blaming a combination of factors: slower sales, high cancellation rates, and increased use of concessions and incentives to spur prospective buyers. Hovnanian shares fell 29 cents yesterday to close at $29.59.
In its Oct. 3 memo, Hovnanian told its employees it is working to renegotiate the terms of some of the company's land options, in the hope of reducing purchase prices or extending the time periods in which they agreed to exercise them. Builders can either own their land outright or hold options to buy land, which are easier to walk away from, according to analysts.
Typically, when builders take write-downs to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up, said Robert Curran, a senior housing analyst at Fitch Ratings.
Larry Sorsby, Hovnanian's chief financial officer, said yesterday no comparisons should be drawn between his company's decision to tighten its belt and Kara Home's financial troubles"We are still in very good shape financially and are still very solidly profitable," Sorsby said. "No one knows for sure (how long the housing slump might last), but we want to prepare the company and our associates as if this is not going to be short term in duration."
Meanwhile, plumbers, roofers, general contractors and others who are owed millions of dollars from Kara Homes said they have known for a while the homebuilder was having problems. Papers filed with the bankruptcy court show the company owes at least three businesses more than $1 million and more than a dozen $500,000 or more.
Anthony Polonio, president of Polo Plumbing and Heating in Metuchen, said about 30 percent of his business this year came from Kara Homes. Court filings indicate he is owed $132,000, but Polonio said the real figure is double that.
"It will have a big" impact, Polonio said, noting he might have to lay off one or two of his 30 employees. "I think eventually it will come down to that."
Anthony Garofalo, president of Vintage Contracting of NJ in Belmar, has been working with Kara Homes since it started in the mid'90s. He said he has filed about $650,000 in liens against the homebuilder, but because of the size of his business, it shouldn't affect operations.
Garofalo said he spoke with Kara Homes president Zuhdi Karagjozi earlier in the week and Karagjozi told him he planned to emerge from bankruptcy to continue building homes.
"I believe it was the economy, the market itself, and some lack of projecting (by Kara Homes) to some degree," Garofalo said. Other factors, such as a slowdown in sales and massive incentives the homebuilder was offering, also contributed to the bankruptcy, he said.
Sam Ali may be reached at sali@starledger.com or (973) 392-4188.
© 2006 The Star-Ledger.
©2006 New Jersey On-Line LLC. All Rights Reserved.
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