Toll Brothers Earnings Drop: High-End Customers Are Not Immune From Housing Bust

The Toll Brothers (TOL) news yesterday of an 85% drop in earnings last quarter says it all: "Cancellations" at the high-end from a homebuilder that requires a "significant non-refundable down-payment" in markets where there is "excess housing supply." The news suggests that even Toll's customers, high FICO scores notwithstanding, were stretching and/or speculating in a market that was overheated.

But here's the dead giveaway on how bad it really is and why this mortgage/credit/markets thing is not yet over: Even though its customers tend to have lower loan-to-value ratios "and attractive credit profiles," the company said that "mortgage market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes."

And this is a report for a period ended July 31, which is before the really bad news hit. Toll also discussed its concerns about the "secondary" mortgage market. I'll assume that's the market for securitizations, not second mortgages. If Toll's lower loan-to-value ratios were in some part the result of second mortgages filling the gap, thus making them artificially low, then all bets are off.

TOL 1-yr chart: