Toll Brothers CEO Bob Toll (TOL) has been incredibly prescient in selling his company shares at the right time. In 2005, at the market peak, he sold $500 million worth of shares. He bought some back during the lows of 2008. His bid to sell 3 million shares now is a strong indicator that homebuilder stocks will continue to struggle this year.
There is no sign of a let up in the housing slump, and now there are indications that homebuilders like Toll and Hovnanian Enterprises (HOV), which have significant investments in the NY area market, will be facing greater headwinds there this year. The NY real estate market has held up relatively well since the housing slump began.
Until now. WSJ reports that the NYC housing market is slowing markedly. Particularly hard-hit are the outlying areas like Harlem and Brooklyn that grew dramatically in recent years as prices in the borough of Manhattan soared out of reach for most homebuyers:
While none of Manhattan's neighborhoods appear immune from the coming downturn, emerging districts will be particularly hard hit. In Harlem, a historically African-American community that experienced the biggest building boom in several decades, prices remained flat, but sales in the third quarter plunged 76% compared with Q307.
Real-estate brokers say the decline in Harlem sales activity partly reflects the difficulty some potential buyers are having obtaining mortgages. At the same time, some buyers once attracted to Harlem can now afford to buy in more-established communities. "If you have $1 million to spend, Harlem is much less attractive to you," said Matthew Haines, a Harlem resident and founder of PropertyShark.com.
One sure sign of steeper price cuts to come. The inventory of [Manhattan] homes for sale was up 39% in the fourth quarter from the same quarter a year ago.
The Brooklyn Paper is skeptical about Toll's projects there:
If we had such a thing, the award for cajones of the year could easily go to Toll Brothers. A developer best known for suburban McMansions, the company is moving forward with a plan to build posh housing along the fetid Gowanus Canal. [Brooklyn] area residents say the proposal is too big and too risky so close to the canal.
Toll is even experimenting with a different sales model as the Manhattan satellite markets continues to slide:
[Since] the credit crisis and the meltdown on Wall Street, sales traffic... began to slow down, and today about a third of [the Brooklyn] condos remain unsold. Faced with the prospect of empty units and static cash flow, just as sales were starting on an even larger sister tower — Two Northside Piers — the developer, Toll Brothers, decided to take a different approach and expand a program used elsewhere in the country that allows prospective owners to lease with the option to buy, using part of the rent toward the purchase.
Rent-to-own options, which come in many variations, have become increasingly common for developers in areas where home foreclosures are high, like Nevada, California and Florida. In most cases, the accumulated rent is used to lower the purchase price or to reduce closing costs... In the last several months, as residential sales have softened in the city and throughout the region, other developments (many in parts of Brooklyn that are rife with new construction), have been offering similar deals.
Toll said on its FQ408 conference call in early December that its backlog in the northeast was rising. The northeast had been the stronger market until now:
Q: About the northeast market... 42% of the backlog seems to be in the north. How much of that is the New York, New Jersey metro area?
A: I think most of it is Massachusetts, not much. Connecticut is for this market doing okay. The rest of the market I would say is pretty much [inaudible].
Hovnanian said on its FQ408 conference call that its Manhattan satellite markets were struggling. The company took writedowns on its New Jersey property, though CEO Ara K. Hovnanian claimed New Jersey was holding up pretty well compared to other markets:
Another component of the impairments that we took during the fourth quarter was for our goodwill which was from acquisitions that we made in the Texas and New Jersey in 1999 and in Washington DC during 2001... The reality is the New Jersey market has not been as nearly affected as many other parts of the country including Florida or California or Phoenix.
Barron's reported in early December that Hovnanian was struggling to find funding for some of its New Jersey projects:
In the midst of the most wretched period for home building in memory, homebuilder [Hovnanian] has evidenced ambitions as broad as the New Jersey land it’s clear-cut to put up houses nobody can or will buy. It’s been talking for months with prospective finance sources about putting up the capital it needs to fund its home-building enterprise, according to the Dow Jones Newswires, but thus far all that effort has produced has been frustration.
Hovnanian announced recently that homebuyers at its NJ condo project "The Views" were now eligible for FHA loans. The homebuilder said it should up demand even more. Seeking Alpha's Microcap Speculator says yesterday's 15% spike for Hovnanian doesn't mean much and sees nothing on the horizon to warrant buying HOV shares.
One bright light of hope? Homebuilders may get that carryback clause extension that they've been asking for all year.
More on that later.
