Majestic Research

Reuters

US Home Builders Rally on Mortgage, Toll Bros. Data

By Nick Zieminski, Lilla Zuill and Ilaina Jonas
Published: August 08, 2007

Home builders rallied on Wednesday, fueled by better-than-expected preliminary sales at Toll Brothers Inc. and an increase in mortgage applications.

The Dow Jones Home Construction index closed up 6.6 percent at 504.27, as Beazer Homes USA Inc and WCI Communities Inc each jumped more than 24 percent.

The Mortgage Bankers Association said U.S. mortgage applications rose for the first time in three weeks and a realtors group predicted an upturn in existing home sales.

“You have real data saying applications are up,” said analyst John Tomlinson of Majestic Research. “You get a couple good points of news and a lot of the people who are short the stock tend to rush to cover, and you see these huge bounces.”

Also supporting the sector were comments from Toll that it would not open as many new communities for development, Tomlinson said.

“They’re taking a conservative stance in a slow market, which investors cheer,” he said.

Chief Executive Robert Toll said he believed there was pent-up demand, though buyers were staying on the sidelines.

“With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down,” Toll told analysts and investors.

Toll said demand has stabilized near Washington DC and the Philadelphia suburbs, and said he saw increased business in Connecticut. But Massachusetts, Nevada and suburban New York and New Jersey have worsened, he said.

Based on preliminary results, Toll Brothers said its third-quarter home-building revenue fell 21 percent to about $1.21 billion in the third quarter.

Analysts had expected total sales of $1.11 billion. In May, Toll had forecast $990 million to $1.28 billion.

The company said the net number of signed contracts for the third quarter ended July 31—a key predictor of future revenue—was down 31 percent from a year earlier to $727.1 million, and cancellation rates rose.

The decline in contracts was worse than expected, said real estate analyst Mike Larson of Weiss Research in Jupiter, Florida.

“What happened in subprime, the tightening of lending standards, is starting to a lesser extent to spread to jumbos, so that could be an obstacle for Toll,” Larson said.

Jumbos are loans for purchases of large or luxury homes, the core of Toll’s business. A home building recovery was not likely before the second half of 2008, Larson said.

The National Association of Realtors cut its sales forecast for the year for the sixth consecutive month. But it predicted prices of existing homes will decline by less than initially thought. For more see [ID:nN08286372]

Home construction has fallen for more than a year on weakening demand and rising interest rates. Problems in subprime lending—loans to those with sketchy credit histories—have made it even more difficult for potential buyers, even those with good credit, to get a mortgage.

Toll said that under current market conditions, it was not comfortable giving an earnings outlook. The company plans to report its third-quarter results on Aug. 22.

The Horsham, Pennsylvania-based company estimates its pretax write-down for operating communities, land and land options for the quarter at $125 million to $175 million.

The company’s third-quarter backlog of homes on order fell 34 percent from a year earlier to about $3.67 billion. The third-quarter cancellation rate was 23.8 percent, compared with 18.9 percent in the previous quarter.

Toll shares closed up $1.38 at $24.33 on the New York Stock Exchange. It was the stock’s biggest one-day percentage gain since June 2006.

Including Wednesday’s rally, the stock is down about 2 percent over the past year, a smaller loss than the 15 percent drop in the Home Construction index.