Majestic Research

Bloomberg News

Toll Says 1st-Qtr Orders Plunge 29%; Cuts Forecast

Published: February 07, 2006

Feb. 7 (Bloomberg)—Toll Brothers Inc., the largest U.S. builder of luxury homes, said fiscal first-quarter orders plunged 29 percent and cut its 2006 sales forecast as buyers waited to see whether prices would fall.

Toll, whose homes cost almost three times the U.S. average, said orders for the period ended Jan. 31 dropped to 1,544 from 2,173 a year earlier. Sales will rise as little as 4.9 percent this year, half its previous forecast, the Horsham, Pennsylvania-based company said in a statement today.

“The higher-end buyers are beginning to realize they don’t have to rush in—that maybe if they hold out prices will moderate,’’ said John Tomlinson, a housing analyst with Majestic Research in New York.

Toll’s shares have lost half their value since July on investor concern that sales of its $700,000 homes will be hit harder by rising mortgage rates than those of cheaper homes built by companies including D.R. Horton Inc. U.S. new-home sales will fall 4.4 percent this year following 14 straight interest-rate increases by the Federal Reserve, according to the Mortgage Bankers Association in Washington.

“The Toll Brothers data is telling us that the fairy dust of rising home prices is floating away,’’ Stephen Roach, chief global economist at Morgan Stanley in New York, said in an interview.

U.S. homeowners paid off their mortgages at the slowest pace in almost three years, more evidence the housing market is cooling, Washington-based Fannie Mae, the biggest home lender, said today.

Shares Fall
Toll’s shares fell 98 cents, or 3.1 percent, to $30.22 at 11:56 a.m. in New York Stock Exchange composite trading. They’ve declined 48 percent since hitting a record on July 20. Shares of D.R. Horton, the largest U.S. homebuilder, are down 19 percent over the same period, while No. 2 Pulte Corp. is off 21 percent.

The drop in Toll’s orders was the first since the 2.3 percent decline in fiscal second quarter of 2003. The company said it expects to sell 9,200 to 9,900 homes in fiscal 2006, down from a November forecast of 9,500 to 10,200. It delivered 8,769 homes last year.

Homebuilding revenue for the quarter rose 34 percent to $1.33 billion. Toll delivered 1,879 homes, up from 1,590 a year earlier. Its backlog of undelivered homes rose to 8,667, with a value of $5.97 billion, from 7,439 at $4.95 billion.

Expensive Homes
The average Toll home costs $709,000, compared with the U.S. average of $272,900. Toll’s selling price rose 14 percent from a year ago, compared with a 2.4 percent gain for the industry. The average price of a Toll home under contract was up 11 percent from a year ago, the company said.

Chief Executive Officer Robert Toll said buyers were holding off because they expected the market to soften.

“We believe when expectations of home-price appreciation are strong, buyers are willing to wait a year or more for their homes,’’ Toll, 65, said in the statement. “When their expectations are more modest, they are less willing to commit so far in the future.’’

“It can take as much as a year to build a Toll-sized house, so we’re seeing closings that were negotiated when the high end of the market was booming,’’ said Karl Case an economics professor at Wellesley College in Wellesley, Massachusetts. “They’re not going to be able to replicate that now because we’re going to see prices start to level off—not collapse.’’

Sales to Decline
U.S. sales of new homes probably will fall to 1.23 million this year, the second-highest on record, the mortgage bankers said in a Jan. 25 forecast. The average U.S. rate for a 30-year fixed mortgage probably will be 6.3 percent this year, rising from 5.9 percent in 2005, the Washington trade group said.

“We can’t hold at the pace we had last year,’’ said David Seiders, chief economist of the National Association of Home Builders in Washington. “It’s not going to be the end of the world—it’s going to be a simmering down to a very healthy pace.’’

Toll, the No. 6 U.S. builder by stock-market value, typically issues preliminary revenue figures in advance of its earnings report, scheduled for Feb. 23. It will update its earnings forecast at that time. On Dec. 8, Toll said it expected to earn $4.79 a share to $5.27 a share.

(Toll Brothers will hold a conference call to discuss preliminary results at 2 p.m. New York time. It will be broadcast via the investor relations page of the company’s Web site at http://www.tollbrothers.com.)