last quarter, Hovnanian Enterprises posted weak results, reporting a net loss that sent its stock price (HOV) down. Three months later, the company appears to have bounced back as it makes a strategic shift, but the warning signs persist.
Hovnanian Enterprises, the parent company of K. Hovnanian Homes, beat Wall Street expectations by reporting $20.9 million in revenue for Q1 2026, a welcome result for a builder that was in the red just a quarter earlier.
The improved performance comes as the company moves from entry-level housing to a higher-end, higher-end product. Unsurprisingly, the builder also reported strong demand in the latter half of the quarter.
However, there are still reasons for concern that highlight the challenging housing market. UK. Hovnanian, who remains committed to a price-skimming philosophy, is relying on higher incentives to clear inventory, pushing homebuilding’s gross profit margins to 13.4%, 490 points lower than last year.
“Comparisons are difficult, especially because we offered even greater incentives this year to maintain sales levels, which drove a significant year-over-year decline in profits. In addition, deliveries were lower due to slower market conditions,” Hovnanian Enterprises CEO Ara K. Hovnanian said during an earnings call Wednesday.
To change things, K. Hovnanian sells low-cost, entry-level inventory and transitions to high-margin product mix. Management expects this change in strategy to drive profits and margins higher in the latter half of the year, but in today’s environment, nothing is certain.
Feeding machine: spec, incentives and high speed formula
Although many builders deliberately lower their cutoff figures, K. Hovnanian has deliberately chosen to keep a high number of spec houses to support its pricing strategy. Focusing on specifications and sales before construction is complete, K. Hovnanian can re-sign and deliver additional contracts during the same quarter.
“This approach means we have fewer homes in the backlog at the end of each quarter, but a higher rate of converting the backlog into deliveries. In the first quarter of 2026, 41% of the homes we delivered were sold and closed in the same quarter, the highest percentage we’ve recorded since we started tracking this metric in 2023,” Hovnanian said.
IK. Hovnanian has the fourth highest share of controlled lots with options at 86%, and the second highest rate of asset turnover among public housing peers.
“This is an important part of our strategy because it means that we sell and change our inventory much faster than many of our competitors, which shows the efficient use of our capital. This shows many other factors in addition to the light of the world. We see many opportunities to use land options, and to reduce the purchase of land at the beginning of construction and the start of construction until the end of the cycle, which can further help us to improve our inventory of Inventory, Brad Onanisi.
Despite the strong pace of sales, the spec’s share has fallen sequentially in each of the last quarters, falling from 79% to 71% in the previous quarter. This is important because margins will be built to about 780 basis points higher than last quarter. However, this was not a deliberate strategy but a sign of market trends.
“That wasn’t part of a smart strategy to do that. It just so happens that some of our offerings. We often offer QMIs and under-construction properties, and it just so happens that the demand for under-constructions in our markets has been growing lately.
Incentives, which now account for 12.6% of the average sales price, have started to decline but are still up about 290 points from a year ago. When asked by the commentator whether K. Hovnanian plans to dial back incentives to get higher margins and lower speeds, Hovnanian confirmed his commitment to his current strategy.
“Some of our peers have clearly made a decision to offer smaller incentives and seek higher margins, even with slower volumes that often translate. For us, it is better to focus on speed compared to price. We will continue to promote,” he explained.
Low-margin lot trading and pivoting mix
The philosophy of pace-over-price is central to K’s operational thesis. Hovnanian. But to understand why this strategy makes sense for a New Jersey-based builder in the here and now, it’s important to take a closer look at their building positions.
Many homes K. Hovnanian’s current for sale are low-end, entry-level homes in smaller markets nearby. These properties, although very affordable, are exactly the type that require high compensation and price cuts, which hurt margins. As a result, K. Hovnanian decided to change tactics.
“We’ve shifted our focus on new land acquisitions from low-end, entry-level housing on the outskirts to more residential areas in areas A and B, as well as a focus on active senior communities,” Hovnanian explained.
In the first half of fiscal 2026, K. Hovnanian focuses on selling quickly with low-margin inventory, even if that means sacrificing some value and margin. In the second half of the year, the manufacturer predicts that high-priced inventory will dominate deliveries, which could push margins and profits higher.
“Our strategy, while compressing near-term margins, enables us to clear old, low-margin lots and position them for improved profitability as new communities come online, communities that were already underwritten in today’s encouraging environment,” Hovnanian said.
IK. Hovnanian, which operates in 13 states, mainly in the Mid-Atlantic and Sun Belt, as well as in California, Illinois and Ohio, saw its strongest performance in the Mid-Atlantic. Specifically, Hovnanian identified Delaware, Maryland, New Jersey, Virginia, West Virginia and South Carolina as strong states with a limited number of communities facing rising rates.
The first signs of a comeback?
Some community builders have reported a larger-than-expected rise in demand and traffic since mid-December, an increase that eclipses normal seasonal patterns. Many homebuilders at the International Builders’ Show last week noted similar trends, although underlying data still showed relatively weak demand.
Although K. Hovnanian does not expect an increase in demand or a significant improvement in market conditions throughout the year, managers reported some positive signs.
The specal figure for the builder has fallen as the demand for built-to-order houses has been marked. While demand in November and December was lower than the same period of 2024, the builder’s sales level in January 2026 improved compared to the previous year, and that trend continued in the first few weeks of February.
This gives a glimmer of hope that the spring selling season could be relatively strong and suggests that the housing market has slowed. However, whether this trend continues is uncertain, as weak consumer confidence, economic uncertainty, and affordability issues persist.
Nimbleness and agility are essential
K’s total loss. Hovnanian in Q4 2025 and its improved performance, albeit muted, in Q1 underlines the importance of responding to market pressures. By focusing on rising buyers and active-adult communities in desirable locations, the builder believes it can keep sales strong without relying heavily on discounts and incentives.
Management believes that margins will improve as this more desirable inventory accounts for a larger portion of total assets in future quarters, but the long-term impact of this strategy remains to be seen.
