Item 1. Business
ITEM 1
BUSINESS
 
Business Overview
 
Hovnanian Enterprises, Inc. (“HEI”) conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company,” “we,” “us” or “our” refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries). Through its subsidiaries, HEI designs, constructs, markets, and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments and is one of the nation’s largest builders of residential homes. Founded in 1959 by Kevork Hovnanian, HEI was incorporated in New Jersey in 1967 and reincorporated in Delaware in 1983. Since the incorporation of HEI’s predecessor company, the Company combined with its unconsolidated joint ventures have delivered in excess of 361,000 homes, including 6,090 homes in fiscal 2022. Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and its financial services segment. During the fourth quarter of fiscal 2022, we reevaluated our reportable segments as a result of changes in the business and our management thereof. In particular, we considered the fact that, since our segments were last established, the Company had exited the Minnesota, North Carolina and Tampa markets and is currently in the process of exiting the Chicago market. Applying the principles set forth under Accounting Standards Codification ("ASC") 280, "Segment Reporting" ("ASC 280"), including that our business trends are reflective of economic conditions in markets with general geographic proximity, we realigned our homebuilding operating segments and determined that, in addition to our financial services segment, we now have three reportable homebuilding segments comprised of (1) Northeast, (2) Southeast and (3) West. All prior period amounts related to the segment change have been retrospectively reclassified throughout this Annual Report on Form 10-K to conform to the new presentation.
 
Excluding unconsolidated joint ventures, we are currently offering homes for sale in 121 communities in 29 markets in 14 states throughout the United States. We market and build homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters. We offer a variety of home styles at base prices ranging from $156,000 to $1,485,000 with an average sales price, including options, of $513,000 nationwide in fiscal 2022.
 
Our operations span all significant aspects of the home-buying process – from design, construction, and sale, to mortgage origination and title services.
 
The following is a summary of our growth history:
 
1959 - Founded by Kevork Hovnanian as a New Jersey homebuilder.
 
1983 - Completed initial public offering.
 
1986 - Entered the North Carolina market through the investment in New Fortis Homes.
 
1992 - Entered the greater Washington, D.C. market.
 
1994 - Entered the Coastal Southern California market.
 
1998 - Expanded in the greater Washington, D.C. market through the acquisition of P.C. Homes.
 
1999 - Entered the Dallas, Texas market through our acquisition of Goodman Homes. Further diversified and strengthened our position as New Jersey’s largest homebuilder through the acquisition of Matzel & Mumford.
 
2001 - Continued expansion in the greater Washington D.C. and North Carolina markets through the acquisition of Washington Homes. This acquisition further strengthened our operations in each of these markets.
 
2002 - Entered the Central Valley market in Northern California and Inland Empire region of Southern California through the acquisition of Forecast Homes.
 
2003 - Expanded operations in Texas and entered the Houston market through the acquisition of Parkside Homes and Brighton Homes. Entered the greater Ohio market through our acquisition of Summit Homes and entered the greater metro Phoenix market through our acquisition of Great Western Homes.
 
2004 - Entered the greater Tampa, Florida market through the acquisition of Windward Homes and started operations in the Minneapolis/St. Paul, Minnesota market.
 
2005 - Entered the Orlando, Florida market through our acquisition of Cambridge Homes and entered the greater Chicago, Illinois market and expanded our position in Florida and Minnesota through the acquisition of the operations of Town & Country Homes, which occurred concurrently with our entering into a joint venture with affiliates of Blackstone Real Estate Advisors to own and develop Town & Country Homes’ existing residential communities. We also entered the Cleveland, Ohio market through the acquisition of Oster Homes.
    
2006 - Entered the coastal markets of South Carolina and Georgia through the acquisition of Craftbuilt Homes.
 
During fiscal 2016, we exited the Minneapolis, Minnesota and Raleigh, North Carolina markets and sold land portfolios in those markets. During fiscal 2018, we completed a wind down of our operations in the San Francisco Bay area in Northern California and in Tampa, Florida. During fiscal 2020, we began a wind down of our operations in the Chicago, Illinois market and expect to exit that market in the second quarter of fiscal 2023.
 
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Geographic Breakdown of Markets by Segment
 
The Company markets and builds homes that are constructed in 20 of the nation’s top 50 housing markets. We segregate our homebuilding operations geographically into the following three segments:
 
Northeast: Delaware, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia
 
Southeast: Florida, Georgia and South Carolina
 
West: Arizona, California and Texas
 
For financial information about our segments, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Human Capital
 
As of October 31, 2022, we employed 1,866 full-time associates of whom 1,291 were involved in our homebuilding operations, 170 were involved in our financial services operations and 405 were involved in our corporate operations. We do not have collective bargaining agreements relating to any of our associates.
 
Successful execution of our strategy is dependent on attracting, developing and retaining key associates and members of our management team. The skills, experience and industry knowledge of our team significantly benefit our operations and performance. We continuously evaluate, modify, and enhance our internal processes and technologies to increase engagement, productivity, efficiency and the skills our associates need to be successful.
 
We believe that talented associates are the Company’s greatest asset and play a key role in creating long-term value for our stakeholders. As of October 31, 2022, 18.5% of our associates had been with the Company for more than 15 years, and the average tenure of all associates was approximately seven years. We understand that our ultimate success and ability to compete are significantly dependent on how well we identify, hire, train, and retain highly qualified personnel. We realize that each associate has a unique vision and their own special talents. We are committed to being an employer that fosters the growth of each associate, while building an inclusive and diverse workforce.
 
In fiscal 2022, our Accelerated Leadership Development Program ("ALDP") graduated its second class following the initial success of the 2018 ALDP. The goal of this program is to identify and mentor leaders within, and identify talent outside, of the organization in order to drive growth and value creation, as well as considerations for succession planning. We actively seek to attract women and candidates of diverse backgrounds to the ALDP and we significantly increased the number of women and underrepresented groups with our second ALDP class.
 
We believe that our focus on diversity and inclusion across the organization positions the Company to deliver innovation and growth. We have a diverse associate base comprised of 26.2% non-white associates as of October 31, 2022. Additionally, as of October 31, 2022, 43.2% of our associates were women, and women represent 37.8% of all associates in manager and more senior positions.
 
Promoting a diverse and inclusive work environment is a major priority at Hovnanian. In 2020, the Company formed a Diversity & Inclusion Committee that continues to be an important initiative and which is led by the CEO and comprised of members of senior leadership and associates in various functions throughout the organization representing various backgrounds. The objective of the committee is to advise on and evaluate the Company’s diversity and inclusion initiatives and to offer suggestions and guidance. The Diversity & Inclusion Committee meets quarterly. All associates are required to take a Diversity Made Simple training course. Associates in leadership positions (representing approximately 21.8% of all associates) are obligated to participate in more extensive diversity and inclusion training sessions.
 
The Company is also a founding member of the Building Talent Foundation whose mission is to advance the education, training and careers of people from underrepresented groups in the fields of skilled technical workers and as business owners in the residential construction industry. In fiscal 2022, we extended our partnership and financial commitment with the Building Talent Foundation for another three years.
 
Through a combination of competitive benefits and educational programs, we believe that we positively contribute to the well-being of our associates and the communities in which they live and work. Our benefits packages include medical, dental, and vision coverage, as well as health savings accounts, life insurance, disability income, 401(k) savings plan with a company match and other assistance and wellness programs. Together, these benefits help keep our associates and their dependents healthy, while giving them tax-advantaged ways to save for retirement and establish long-term financial security. This package of programs is routinely reevaluated in order to meet the changing needs of our associates in our diverse organization.
 
In light of the Company’s experience managing the novel coronavirus ("COVID-19") pandemic and the recognition of the associated environmental benefits, the Company introduced a hybrid work schedule in fiscal 2021 and continued to implement it throughout fiscal 2022 whereby most office associates may work two days a week from home. We believe this change to a hybrid work model promotes a healthier work and home life balance for our associates while simultaneously providing the environmental benefits of having fewer vehicles on the road. In addition to the weekly hybrid schedule, associates can work remotely up to eight weeks a year.
 
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We also have committed considerable resources to furthering our associates’ personal and professional growth. We have a repository of over 400 training modules/courses to facilitate these learning sessions in both in-person and virtual settings, including mandatory diversity, ethics, sexual harassment and safety training courses.
 
Corporate Offices and Available Information
 
Our corporate offices are located at 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747 (See Item 2 "Properties"). Our telephone number is 732-747-7800, and our Internet web site address is www.khov.com. Information available on or through our web site is not a part of this Form 10-K. We make available free of charge through our web site our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission ("SEC"). Copies of the Company’s Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports are available free of charge upon request. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
Business Strategies
 
We are currently focused on maintaining adequate liquidity and identifying investment opportunities that make economic sense in light of our current sales prices and sales paces. Our excess liquidity in fiscal years 2022 and 2021 allowed us to repurchase $100.0 million and $180.9 million in aggregate principal of senior secured notes, respectively. In response to changing market conditions, we will be strategic in new land purchases at pricing that we believe will generate appropriate investment returns needed to sustain profitability. We are also beginning to explore Build For Rent opportunities to supplement our existing business. The Build For Rent sales channel has the potential to add incremental sales volume and allow us to increase inventory turnover. In addition to our current focus on liquidity and flexibility, we intend to continue to focus on our historic key business strategies, as enumerated below. We believe that these strategies separate us from our competitors in the residential homebuilding industry and the adoption, implementation and adherence to these principles will continue to benefit our business.
 
Our goal is to become a significant builder in each of the selected markets in which we operate, which will enable us to achieve economies of scale and differentiate ourselves from most of our competitors.
 
As noted above, we offer a broad product array to provide housing to a wide range of customers. Our customers consist of first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters. Our diverse product array includes single-family detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes.
 
We are committed to customer satisfaction and quality in the homes that we build. We recognize that our future success rests in the ability to deliver quality homes to satisfied customers. We seek to expand our commitment to customer service through a variety of quality initiatives. In addition, our focus remains on attracting and developing quality associates. See "Human Capital" above for further discussion.
 
We focus on achieving high returns on invested capital. Each new community is evaluated based on its ability to meet or exceed internal rate of return requirements. Our belief is that the best way to create lasting value for our shareholders is through a strong focus on return on invested capital.
 
We prefer to use a risk-averse land acquisition strategy. We attempt to acquire land with a minimum cash investment and negotiate takedown options, thereby limiting the financial exposure to the amounts invested in property and predevelopment costs. This approach significantly reduces our risk and generally allows us to obtain necessary development approvals before acquisition of the land.
 
Our strategy also includes homebuilding and land development joint ventures as a means of controlling lot positions, expanding our market opportunities, establishing strategic alliances, reducing our risk profile, leveraging our capital base and enhancing our returns on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to home buyers. Our land development joint ventures include those with developers and other homebuilders, as well as financial investors to develop finished lots for sale to the joint venture’s members or other third-parties.
 
We manage our financial services operations to better serve all of our home buyers. Our current mortgage financing and title service operations enhance our contact with customers and allow us to coordinate the home-buying experience from beginning to end.
 
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Operating Policies and Procedures
 
We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies and procedures:
 
Training - Our training is designed to provide our associates with the knowledge, attitudes, skills and habits necessary to succeed in their jobs. Our training department regularly conducts in-person, online or webinar training in sales, construction, administration and managerial skills.
  
Land Acquisition, Planning, and Development - Before entering into a contract to acquire land, we complete extensive comparative studies and analyses which assist us in evaluating the economic feasibility of such land acquisition. We generally follow a policy of acquiring options to purchase land for future community developments.
 
 
●
Where possible, we acquire land for future development through the use of land options, which need not be exercised before the completion of the regulatory approval process. We attempt to structure these options with flexible takedown schedules rather than with an obligation to take down the entire parcel upon receiving regulatory approval. If we are unable to negotiate flexible takedown schedules, we will buy parcels in a single bulk purchase. Additionally, we purchase improved lots in certain markets by acquiring a small number of improved lots with an option on additional lots. This allows us to minimize the economic costs and risks of carrying a large land inventory, while maintaining our ability to commence new developments during favorable market periods.
 
 
 
 
●
Our option and purchase agreements are typically subject to numerous conditions, including, but not limited to, our ability to obtain necessary governmental approvals for the proposed community. Generally, the deposit on the agreement will be returned to us if all approvals are not obtained, although predevelopment costs may not be recoverable. By paying an additional nonrefundable deposit, we have the right to extend a significant number of our options for varying periods of time. In most instances, we have the right to cancel any of our land option agreements by forfeiture of our deposit on the agreement. In fiscal 2022, 2021 and 2020, rather than purchase additional lots in underperforming communities, we took advantage of this right and walked away from 5,121 lots, 3,201 lots and 3,900 lots, respectively, out of 27,617 total lots, 23,624 total lots and 20,204 total lots, respectively, under option, resulting in pretax charges of $5.7 million, $1.6 million and $6.8 million, respectively.
   
Design - Our residential communities are generally located in urban and suburban areas easily accessible through public and personal transportation. Our communities are designed as neighborhoods that fit existing land characteristics. We strive to create diversity within the overall planned community by offering a mix of homes with differing architecture, textures and colors. Recreational amenities, such as swimming pools, tennis courts, clubhouses, open areas and tot lots, are frequently included.
 
Construction - We design and supervise the development and building of our communities. Our homes are constructed according to standardized prototypes, which are designed and engineered to provide innovative product design while attempting to minimize costs of construction. We generally employ subcontractors for the installation of site improvements and construction of homes. Agreements with subcontractors are generally short term and provide for a fixed price for labor and materials. We rigorously control costs through the use of computerized monitoring systems. 
 
Because of the risks involved in speculative building, our general policy is to construct an attached condominium or townhouse building only after signing contracts for the sale of at least 50% of the homes in that building. A majority of our single-family detached homes are constructed after the signing of a sales contract and mortgage approval has been obtained. This limits the buildup of inventory of unsold homes and the costs of maintaining and carrying that inventory.
 
Materials and Subcontractors - We attempt to maintain efficient operations by utilizing standardized materials available from a variety of sources. In addition, we generally contract with subcontractors to construct our homes. We have reduced construction and administrative costs by consolidating the number of vendors serving certain markets and by executing national purchasing contracts with select vendors. Since the COVID-19 pandemic began, we have experienced construction delays due to shortages in the supply of materials, as well as labor shortages in all of our markets. The impact and the particular materials associated with the delays is varied from market to market and we are currently experiencing increased construction cycle times by 45-60 days in many of our markets, but such timeframes could be elongated. We cannot predict the extent to which shortages in necessary materials or labor will continue or re-occur in our markets in the future. However, as home sales slow nationally, we expect pressure to alleviate on material suppliers and subcontractors, which over time should, absent other factors, allow construction cycle times to revert back to historical norms.
 
Marketing and Sales - Our homes in residential communities are sold principally through on-site sales offices. In order to respond to our customers’ needs and trends in housing design, we rely upon our internal market research group to analyze information gathered from, among other sources, buyer profiles, exit interviews at model sites, focus groups and demographic databases. We make use of our website, internet, newspaper, radio, television, magazine, billboard, video and direct mail advertising, special and promotional events, illustrated brochures and full-sized and scale model homes in our comprehensive marketing program. Recently, we have begun offering curated Looks packages for customers to select, rather than a large number of a la carte options. This approach provides customers with a more streamlined selection process and allows us to be more efficient in purchasing, sales and construction. 
 
We have a national call center which is responsible for follow up generated by our web site and our digital marketing efforts. The call center supports our ability to swiftly respond to incoming customer leads, schedule and conduct virtual tours and video chats, as well as set up in person model home tours.
 
Customer Service and Quality Control - In many of our markets, associates are responsible for customer service and preclosing quality control inspections as well as responding to post-closing customer needs. Prior to closing, each home is inspected, and any necessary completion work is undertaken by us or our subcontractors. Our homes are enrolled in a standard limited warranty program which, in general, provides a homebuyer with a limited warranty for the home’s materials and workmanship which follows each state’s applicable statute of repose. All of the warranties contain standard exceptions, including, but not limited to, damage caused by the customer.
 
Customer Financing - We sell our homes to customers who generally finance their purchases through mortgages. Our financial services segment provides our customers with competitive financing and coordinates and expedites the loan origination transaction through the steps of loan application, loan approval, and closing and title services. We originate loans in each of the states in which we build homes. We believe that our ability to offer financing to customers on competitive terms as a part of the sales process is an important factor in completing sales.
 
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During the year ended October 31, 2022, for the markets in which our mortgage subsidiaries originated loans, 10.5% of our home buyers paid in cash and 58.8% of our noncash home buyers obtained mortgages from our mortgage banking subsidiary. The loans we originated in fiscal 2022 were 74.8% prime and 24.1% Federal Housing Administration/Veterans Affairs (“FHA/VA”). The remaining 1.1% of our loan originations represent loans which exceed conforming conventions.
  
We sell virtually all of the loans and loan-servicing rights that we originate within a short period of time. Loans are sold either individually or against forward commitments to institutional investors, including banks, mortgage banking firms, and savings and loan associations.
 
Residential Development Activities
 
Our residential development activities include site planning and engineering, obtaining environmental and other regulatory approvals and constructing roads, sewer, water, and drainage facilities, recreational facilities, and other amenities and marketing and selling homes. These activities are performed by our associates, together with independent architects, consultants and contractors. Our associates also carry out long-term planning of communities. A residential development generally includes single-family detached homes and/or a number of residential buildings containing from two to 24 individual homes per building, together with amenities, such as club houses, swimming pools, tennis courts, tot lots and open areas.
 
Information on housing revenues, homes delivered and average sales price by segment for the year ended October 31, 2022, is set forth below:
 
 
 
 
 
 
 
 
 
 
 
 
(Housing revenue in thousands)
 
Housing Revenues
 
 
Homes Delivered
 
 
Average Sales Price
 
Northeast
 
$
1,068,098
 
 
 
1,895
 
 
$
563,640
 
Southeast
 
 
323,511
 
 
 
650
 
 
 
497,709
 
West
 
 
1,448,845
 
 
 
2,993
 
 
 
484,078
 
Consolidated total
 
$
2,840,454
 
 
 
5,538
 
 
$
512,902
 
Unconsolidated joint ventures(1)
 
$
343,617
 
 
 
552
 
 
$
622,495
 
 
(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 20 to the Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.
 
Net Sales Contracts
 
The dollar value of our net sales contracts, excluding unconsolidated joint ventures, decreased 14.4% to $2.5 billion for the year ended October 31, 2022 from $2.9 billion for the year ended October 31, 2021, and the number of homes contracted decreased 25.7% to 4,477 in fiscal 2022 from 6,023 in fiscal 2021, despite a 3.7% increase in the average number of open-for-sale communities from 109 for fiscal 2021 to 113 for fiscal 2022. We ended fiscal 2022 with 121 active selling communities. Sales pace slowed dramatically during the third and fourth quarters of fiscal 2022, due to an overall slow-down in home demand caused by a sharp rise in mortgage rates, year-over-year home price increases, record high inflation levels and customer fears of an economic recession. 
 
 Information on the dollar value of net sales contracts by segment for the years ended October 31, 2022 and 2021, is set forth below:
  
 
 
 
 
 
 
 
 
 
 
Percentage of
 
(In thousands)
 
2022
 
 
2021
 
 
Change
 
Northeast
 
$
857,240
 
 
$
1,011,639
 
 
 
(15.3
)%
Southeast
 
 
412,975
 
 
 
320,485
 
 
 
28.9
%
West
 
 
1,200,211
 
 
 
1,555,468
 
 
 
(22.8
)%
Consolidated total
 
$
2,470,426
 
 
$
2,887,592
 
 
 
(14.4
)%
Unconsolidated joint ventures(1)
 
$
384,811
 
 
$
536,597
 
 
 
(28.3
)%
 
(1) Represents net contract dollars for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 20 to the Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.
   
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Active Selling Communities
 
The following table summarizes our active selling communities under development as of October 31, 2022. The contracted not delivered and remaining homes available in our active selling communities are included in the consolidated total homesites under the total residential real estate chart in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contracted
 
 
Remaining
 
 
 
 
 
 
 
Approved
 
 
Homes
 
 
Not
 
 
Homes
 
 
 
Communities
 
 
Homes
 
 
Delivered
 
 
Delivered(1)
 
 
Available(2)
 
Northeast
 
 
32
 
 
 
6,116
 
 
 
1,820
 
 
 
850
 
 
 
3,446
 
Southeast
 
 
21
 
 
 
2,916
 
 
 
1,018
 
 
 
502
 
 
 
1,396
 
West
 
 
68
 
 
 
12,024
 
 
 
5,115
 
 
 
834
 
 
 
6,075
 
Total
 
 
121
 
 
 
21,056
 
 
 
7,953
 
 
 
2,186
 
 
 
10,917
 
 
(1)
Includes 379 home sites under option.
(2)
Of the total remaining homes available, 739 were under construction or completed (including 59 models and sales offices), and 5,808 were under option.
 
Backlog
 
At October 31, 2022 and 2021, including unconsolidated joint ventures, we had a backlog of signed contracts for 4,710 homes and 5,535 homes, respectively, representing a 14.9% decrease, with sales values aggregating $1.9 billion and $2.2 billion, respectively. The majority of our backlog at October 31, 2022 is expected to be completed and closed within the next six to nine months.
 
Current base prices for our homes in contract backlog at October 31, 2022, range from $156,000 to $1,205,000 in the Northeast, from $283,000 to $1,485,000 in the Southeast and from $240,000 to $1,075,000 in the West. Closings generally occur and are typically reflected in revenues within six to nine months of when sales contracts are signed.
 
At November 30, 2022 and 2021, our backlog of signed contracts, including unconsolidated joint ventures, was 4,614 homes and 5,820 homes, respectively, with sales values aggregating $1.8 billion and $2.3 billion, respectively. For information on our backlog excluding unconsolidated joint ventures, see the contract table in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Homebuilding: Key Performance Indicators.”
 
Sales of our homes typically are made pursuant to a standard sales contract that provides the customer with a statutorily mandated right of rescission for a period ranging up to 15 days after execution. Sales contracts require a nominal customer deposit at the time of signing. In addition, in some Northeast locations, we typically obtain an additional 5% to 10% down payment due within 30 to 60 days after signing. In most markets, an additional deposit is required when a customer selects and commits to optional upgrades in the home. The contract may include a financing contingency, which permits customers to cancel their obligation in the event mortgage financing at prevailing interest rates (including financing arranged or provided by us) is unobtainable within the period specified in the contract. This contingency period typically is four to eight weeks following the date of execution of the contract. When mortgage rates increase or housing values decline in certain markets, some customers cancel their contracts and forfeit their deposits. Sales contracts are included in backlog once the sales contract is signed by the customer, which in some cases includes contracts that are in the rescission or cancellation periods. However, revenues from sales of homes are recognized in the Consolidated Statements of Operations, when control is transferred to the buyer, which occurs when the buyer takes title to and possession of the home and there is no continuing involvement. For further information on cancellation rates, see the contract cancellation rates table in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Homebuilding: Key Performance Indicators.”
 
Residential Land Inventory in Planning
 
It is our objective to control a supply of land, primarily through options, whenever possible, consistent with anticipated homebuilding requirements in each of our housing markets. Controlled land (land owned and under option) as of October 31, 2022, exclusive of communities under development described above under “Active Selling Communities” and excluding unconsolidated joint ventures, is summarized in the following table. The proposed developable home sites in communities in planning are included in the 31,800 consolidated total home sites under the total residential real estate table in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
   
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Communities in Planning
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
Number
 
 
Proposed
 
 
Land
 
 
 
 
 
 
 
of Proposed
 
 
Developable
 
 
Option
 
 
Book
 
(Dollars in thousands)
 
Communities
 
 
Home Sites
 
 
Price
 
 
Value (1)(2)
 
Northeast:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under option
 
 
84
 
 
 
10,011
 
 
$
744,535
 
 
$
49,359
 
Owned
 
 
11
 
 
 
715
 
 
 
 
 
 
$
46,901
 
Total
 
 
95
 
 
 
10,726
 
 
 
 
 
 
$
96,260
 
Southeast:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under option
 
 
19
 
 
 
2,773
 
 
$
163,181
 
 
$
45,033
 
Owned
 
 
3
 
 
 
50
 
 
 
 
 
 
$
2,862
 
Total
 
 
22
 
 
 
2,823
 
 
 
 
 
 
$
47,895
 
West:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under option
 
 
34
 
 
 
3,525
 
 
$
274,223
 
 
$
22,078
 
Owned
 
 
15
 
 
 
1,623
 
 
 
 
 
 
$
28,628
 
Total
 
 
49
 
 
 
5,148
 
 
 
 
 
 
$
50,706
 
Totals:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under option
 
 
137
 
 
 
16,309
 
 
$
1,181,939
 
 
$
116,470
 
Owned
 
 
29
 
 
 
2,388
 
 
 
 
 
 
$
78,391
 
Combined total
 
 
166
 
 
 
18,697
 
 
 
 
 
 
$
194,861
 
 
(1)
Properties under option also include costs incurred on properties not under option but which are under evaluation. For properties under option, as of October 31, 2022, option fees and deposits aggregated approximately $69.0 million. As of October 31, 2022, we spent an additional $47.5 million in nonrefundable predevelopment costs on such properties, including properties not under option but under evaluation.
(2)
The book value for properties under option includes land banking arrangements of $42.5 million, which is included in "Consolidated inventory not owned" on our Consolidated Balance Sheets.
 
We either option or acquire improved or unimproved home sites from land developers or other sellers. Under a typical agreement with the land developer, we purchase a minimal number of home sites. The balance of the home sites to be purchased is covered under an option agreement or a nonrecourse purchase agreement. During a declining homebuilding market, we typically decide to mothball (or stop development on) certain communities where we have determined that current market conditions do not justify further investment at that time. When we decide to mothball a community, the inventory is reclassified on our Consolidated Balance Sheets from "Sold and unsold homes and lots under development" to "Land and land options held for future development or sale". See Note 3 to the Consolidated Financial Statements for further discussion on mothballed communities.
 
Raw Materials
 
The homebuilding industry has from time-to-time experienced raw material and labor shortages. In particular, shortages and fluctuations in the price of lumber or other important raw materials could result in start or completion delays or increases to the cost of developing one or more of our residential communities. We attempt to maintain efficient operations by utilizing standardized materials available from a variety of sources. In addition, we generally contract with subcontractors to construct our homes. We have reduced construction and administrative costs by consolidating the number of vendors serving certain markets and by executing national purchasing contracts with select vendors. During fiscal 2022, relative to the prior fiscal year, labor and material shortages that were initially due to the COVID-19 pandemic started to gradually improve. For example, we experienced a significant increase in lumber prices during fiscal 2021 and into the first half of fiscal 2022 due to supply chain issues, but prices began to decrease during the second half of fiscal 2022. We cannot predict, however, the extent to which shortages in necessary raw materials or labor may occur in the future.
   
Seasonality
 
Our business is seasonal in nature and, historically, weather-related problems, typically in the fall, late winter and early spring, can delay starts or closings and increase costs.
 
Competition
 
Our homebuilding operations are highly competitive. We are among the top 15 homebuilders in the United States in both homebuilding revenues and home deliveries. We compete with numerous real estate developers in each of the geographic areas in which we operate. Our competition ranges from small local builders to larger regional builders to publicly owned builders and developers, some of which have greater sales and financial resources than we do. Previously owned homes and the availability of rental housing provide additional competition. We compete primarily on the basis of reputation, price, location, design, quality, service and amenities.
 
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Regulation and Environmental Matters
 
We are subject to extensive and complex laws and regulations that affect the development of land and home building, sales and customer financing processes concerning zoning, building design, construction, and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular locality. In addition, we are subject to registration and filing requirements in connection with the construction, advertisement and sale of our communities in certain states and localities in which we operate even if all necessary government approvals have been obtained. We may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums that could be implemented in the future in the states in which we operate. Generally, such moratoriums relate to insufficient water or sewerage facilities or inadequate road capacity.
 
In addition, some state and local governments in markets where we operate have approved, and others may approve, slow-growth, or no-growth initiatives that could negatively affect the availability of land and building opportunities within those areas. Approval of these initiatives could adversely affect our ability to build and sell homes in the affected markets and/or could require the satisfaction of additional administrative and regulatory requirements, which could result in slowing the progress or increasing the costs of our homebuilding operations in these markets. Any such delays or costs could have a negative effect on our future revenues and earnings.
 
We are also subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment, including those regulating the emission or discharge of materials into the environment, the management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“environmental laws”). The particular environmental laws which apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. See Risk Factors – “ Homebuilders are subject to a number of federal, local, state, and foreign laws and regulations concerning the development of land and homebuilding, sales and customer financing processes and the protection of the environment, which can cause us to incur delays and costs associated with compliance and which can prohibit or restrict our activity in some regions or areas”, Item 3 “Legal Proceedings” and Note 18 to the Consolidated Financial Statements.
  
Despite our past ability to obtain necessary permits and approvals for our communities, we anticipate that increasingly stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot reliably predict the extent of any effect these requirements may have on us, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretation and application.