Toll Bros.: Building Some Surprising Strength

One of the most common bits of conventional wisdom surrounding the housing crisis has been that the upper end of the market was just beginning to tank and would suffer for some time. The logic behind the argument is that with the destruction of equity that’s occurred there is and would continue to be a dearth of move-up buyers.

I bought into the argument and I’m not sure that I’ll cast it aside quite yet, but this post from HousingWire makes me pause:

Horsham, Penn.-based Toll Brothers said it signed more contracts during the third quarter of its fiscal year 2009 than it did in the year-ago quarter, even though it has fewer selling communities.

The lift in signed contracts along with a drop in cancellations has the luxury homebuilder cautiously optimistic that upscale housing may be rebounding, despite the company’s $472.3m quarterly loss.

Toll Brothers has 22% fewer selling communities in Q309 than in Q308, but same-store net-signed contracts were up 32% year-over-year, the first yearly increase since the builder’s fiscal Q405.

The builder reported 78 cancellations during Q309, a rate of 8.5%. That’s better than 161 (21.7% cancellation rate) in Q209 and 195 (19.4% cancellation rate) in the year-ago period. It’s the builder’s lowest cancellation rate since fiscal Q206.

“We believe declining cancellations and more solid demand indicate that the housing market is stabilizing. We are reducing incentives and raising prices in selected communities,” chairman and CEO Robert Toll said in a statement. “We believe that customers are recognizing that now is the time to get into the market to take advantage of near-record affordability and what is still, for now, a buyer’s market.”

Interesting trends there. I suppose there are quite a lot of people who have been relatively untouched by the recession who look at now as a great time to pick up a deal, and undoubtedly there are owners who have no mortgage who might well be willing to take what the market will give them in order to move up. I can’t read much more into it than that, and, if I’m right, then that might only signal some demand that’s a mile wide and an inch deep.

Still, it’s an interesting development and suggests that the homebuilders in this sector of the market might have more going for them than many suspect. It might be worth a closer look at some of their stocks.

(See TOL earnings call transcript.)

Comments

[HardwoodFlo...:]

The case that Toll and other Wall Street Home Builders- WSHB-made to investors was that because of their "in-house" market research and "economists" they wouldn't make the mistakes of "mom-pop" shops and that the threat of a housing crisis in the future was minimal. Well we all know how that turned out- they started managing their businesses for their stock prices not the housing market. So can they be trusted in the future that remains to be seen.

What will be a new cold hard reality for these WSHB is this: the size of houses is going to be smaller. This will effect top line and margin. The truth is it cost a WSHB nominally more to build a 5,000 sqft house than it did a 3,000 sqft house. Well, with the new reality of no JUMBOs 5,000 houses are going to be dead in the future. So they will have to down size the houses (margin squeeze) then they will also be selling units for under $400K to qualify for FHA. Huh, so no more $750-1MM houses. Top line shrink.

I just don't see the Toll and WSHB story. the premium houses will be built by smaller builders, with high levels of design that is where the game will be. Then there will be the prefab guys in the low end market. This leaves WSB where? Sort of like Derrall Smalls from SpinalTap: in that luke-warm water.

Even people with 20-30% down with verifiable incomes cannot get loans that are above the $400K FHA backed loan that banks are willing to lend. The truth is banks aren't willing to lend on anything that isn't FHA. This is crushing the top end of the market that is so clearly pointed out in the article.

Unlike cars, a home is very often financed. Lots of people just buy cars with cash. $60K car, lots of people trade in then buy with cash without a auto loan. However, when you start talking about a $1MM house, and you put down $300K, you tend to want to finance the home with a long term mortgage with interest you can deduct from your income etc.

That's the big difference, it's not like there are is a nation of unqualified buyers out there. There are qualified buyers out there but banks have been unwilling to finance them b/c it ain't backed by the government. It's nuts. So then why are banks in business?

I thought they were in business to loan money. Sure sometimes that requires risk. That risk is mitigated by putting down 20% (at least in the old days that meant something) with an idea that it was the person lending it's obligation to pay it back. However, with the government making it so easy for banks, borrowing at zero and lending it out at 6% then securing the loans why write mortgages that aren't secured by the government and that is what's going on.

If there was a "normal" move-up market. If there was financing available that wasn't FHA backed. The RE market, inventory months, prices, new home builds would take off like a rocket.

Jobs would get better, the economy would start rolling again. But as usual with the government involved it's a total cock-up.

Aug 28 03:56 PM

[whidbey:]

Pure speculation on" being there" if demand develops, but notice that TOL is being very circumspect on its commitments.

Do they smell some government new programs in the offing? It is not improbable? The clunkers worked, more or less, to stimulate.

It is easy have Obama's economists will talk to TOL economists and come up something. These little cookies to the market taste sweet going down and 2010 is an election year. Watch out for the steam rollers, they are likely warming up right now.

Aug 28 04:42 PM

[auto44:]

As they said in Barrons when the Toll brothers sold out a large portion of their holding just before the stock crashed,(ask not to whom the Toll brothers sold, they sold to you). Troll brothers is more like it.

Aug 29 06:52 PM

[TheRealSARe...:]

I am as skeptical as the next guy about the health of the WSHBs, but your statement about people with sufficient verifiable income( and good credit) and putting 20-30% down on a 600-800k home is simply not true. There are plenty of buyers out there that are getting loans. I don't know whether this portends the trend for Toll, but for well qualified buyers, the loans are there.


On Aug 28 03:56 PM HardwoodFlooring wrote:

>
> Even people with 20-30% down with verifiable incomes cannot get loans
> that are above the $400K FHA backed loan that banks are willing to
> lend. The truth is banks aren't willing to lend on anything that
> isn't FHA. This is crushing the top end of the market that is so
> clearly pointed out in the article.
>

Aug 30 10:03 PM