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Chapter 26: Problem 3

A newspaper article in the fall of 2007 stated, "The luxuryhome builder Hovnanian Enterprises reported its fourth consecutive quarterly loss on Thursday, citing continuing problems of credit availability and high inventory." Why was Hovnanian suffering losses? What does the article mean by "credit availability"? How would problems of credit availability affect a homebuilder such as Hovnanian Enterprises?

Short Answer

Expert verified
Hovnanian Enterprises' losses come from problems of credit availability and high inventory. Credit availability refers to the ease of getting loans, influenced by the lending criteria of banks. When credit availability is low, fewer customers get approved for home loans, leading to fewer home sales for the company. High inventory exacerbates the issue by forcing the company to cut prices, possibly leading to sales that don't cover building costs.

Step by step solution

01

Understand the Company situation

Hovnanian Enterprises have reported a quarterly loss for the fourth time. There are two main problems that the company faces: 1. Credit availability and 2. High inventory.
02

Define Credit Availability

Credit availability refers to how easily individuals and businesses can borrow money. It is determined by lending standards set by banks and financial institutions, and the Federal Reserve. Less credit availability implies stricter lending standards, implying that borrowing money is tougher, and vice versa.
03

Analyze the Impact of Credit Availability on Hovnanian Enterprises

The problem of credit availability means that fewer individuals can get approved for home loans due to stricter standards. This impacts a home builder like Hovnanian because fewer people being approved for home loans means fewer people can afford to buy homes, which leads to decreased sales.
04

Discuss High Inventory

High inventory refers to the company having a large number of unsold homes. This further aggravates the problem since high inventory signals oversupply, meaning there are more homes available than there are buyers. This leads to reduced prices to sell the homes, which might not cover the cost of building these homes, leading to losses.

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