Last quarter, Hovnanian Enterprises posted weak results, reporting a net loss that sent its stock (HOV) price crashing. Three months later, the company appears to have bounced back as it executes a strategic shift, but warning signs persist.
Hovnanian Enterprises, the parent company of K. Hovnanian Homes, beat Wall Street expectations by reporting $20.9 million in net income in Q1 2026, a welcome result for a builder that was in the red just a quarter earlier.
The improved performance comes as the company shifts away from entry-level homes toward a higher-margin, move-up product. Anecdotally, the builder also reported stronger demand in the latter half of the quarter.
However, there are still reasons for concern that highlight a challenging homebuilding market. K. Hovnanian, remaining committed to a pace-over-price philosophy, relied on heightened incentives to clear inventory, pushing homebuilding gross profit margins to 13.4%, 490 basis points lower than a year earlier.
“The comparison is difficult, mainly because we’ve offered even greater incentives this year to maintain sales pace, which has driven much of the year-over-year decline in profit. In addition, deliveries were lower due to slower market conditions,” Hovnanian Enterprises CEO Ara K. Hovnanian said during an earnings call on Wednesday.
To turn things around, K. Hovnanian is selling through low-margin, entry-level inventory and shifting toward a higher-margin product mix. Executives expect this change in strategy to push profits and margins higher in the latter half of the year, but in today’s environment, nothing is certain.
Feeding the machine: a spec, incentives and high-pace formula
While many builders intentionally reduce their spec count, K. Hovnanian deliberately chose to maintain an elevated number of spec homes to support its pace-over-price strategy. By focusing on specs and selling them before construction is finished, K. Hovnanian can also sign and deliver more contracts within the same quarter.
“This approach means that we have fewer homes in backlog at the end of each quarter, but a higher rate of converting backlog to deliveries. In the first quarter of 2026, 41% of the homes we delivered were both sold and closed within the same quarter, the highest percentage we’ve recorded since we began tracking this metric in 2023,” Hovnanian said.
K. Hovnanian has the fourth-highest share of lots controlled through options at 86%, and the second-highest inventory turnover rate among public homebuilding 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. This reflects many other factors in addition to land-light. We see more opportunities to use land options, as well as reduce lot purchase to construction start and construction start to completion cycle times, which would further help us improve our inventory turnover,” said Brad O’Connor, CFO at Hovnanian Enterprises.
Despite a strong sales pace, the share of specs fell sequentially in each of the last four quarters, declining from a peak of 79% to 71% last quarter. This is important because to-be-built margins were about 780 basis points higher last quarter. However, this wasn’t an intentional strategy but rather a symptom of market trends.
“That wasn’t actually part of a conscious strategy to do that. It just so happens that some of our offerings. We often offer both QMIs and to-be builds, and it just so happens that the demand for to-be builds in our markets has been growing recently.
Incentives, now accounting for 12.6% of the average sales price, have begun to level off but are still up about 290 basis points from a year ago. When asked by an analyst whether K. Hovnanian plans to dial back incentives in exchange for higher margins and a slower pace, Hovnanian reaffirmed his commitment to his current strategy.
“Some of our peers have clearly made the decision to offer less incentives and seek higher gross margins, even with the slower volume that usually translates to. In our case, we’d rather focus on pace versus price. We’ll keep up the incentives,” he explained.
Selling through low-margin lots and pivoting mix
A pace-over-price philosophy is central to K. Hovnanian’s operating thesis. But to understand why this strategy makes sense for the New Jersey-based builder in the here and now, it’s important to take a closer look at their lot positions.
Many of the homes K. Hovnanian is selling right now are low-margin, entry-level homes in peripheral submarkets. These properties, while more affordable, are exactly the type that require high incentives and price reductions, which hurt margins. As a result, K. Hovnanian decided to shift strategies.
“We’ve shifted our focus on new land acquisitions away from lower-margin, entry-level homes on the periphery to more move-up homes in the A and B locations, as well as focusing on more active adult communities,” Hovnanian explained.
For the first half of fiscal 2026, K. Hovnanian is focused on quickly selling through the lower-margin inventory, even if that means sacrificing some price and margin. By the second half of the year, the builder forecasts that higher-margin inventory will dominate deliveries, which could push margins and profitability higher.
“Our strategy, while pressuring near-term margins, enables us to clear older, lower-margin lots and position us for improved profitability as newer communities come online, communities that were already underwritten with today’s higher incentive environment in mind,” Hovnanian said.
K. Hovnanian, which operates in 13 states, primarily in the Mid-Atlantic and Sun Belt, as well as California, Illinois and Ohio, saw some of its strongest performance in the Mid-Atlantic. Specifically, Hovnanian pointed to Delaware, Maryland, New Jersey, Virginia, West Virginia and South Carolina as stronger states with a disproportionate number of communities experiencing price increases.
Early signs of a comeback?
Some public builders have reported a greater-than-expected uptick in demand and traffic since the middle of December, a rise that eclipses typical seasonal patterns. Many homebuilders at the International Builders’ Show last week also noted similar trends, even though the underlying data still shows relatively weak demand.
While K. Hovnanian doesn’t anticipate a spike in demand or a substantial improvement in market conditions for the rest of the year, executives reported some positive signals.
The builder’s spec count fell as demand for built-to-order homes ticked up. While demand in November and December was lower than in the same period of 2024, the builder’s January 2026 sales pace improved compared with a year ago, and that trend continued into the first few weeks of February.
This provides a glimmer of hope that the spring selling season could be comparatively strong and suggests that the homebuilding market has bottomed out. However, whether this trend continues is uncertain, as weak consumer confidence, economic uncertainty, and affordability constraints persist.
Nimbleness and agility matter
K. Hovnanian’s net loss in Q4 2025 and its improved, although muted, performance in Q1 underscore the importance of responding to market pressures. By focusing more on move-up buyers and active-adult communities in desirable areas, the builder believes it can keep sales strong without relying as heavily on discounts and incentives.
Executives believe that margins will improve as this more desirable inventory accounts for a greater share of total inventory in the quarters ahead, but the long-term outcome of this strategy remains to be seen.