During the downturn, desperate home-building companies have cut
prices dramatically and have thrown in everything from free
vacations to below-market mortgage rates as enticements to get
buyers to the closing table. Now, those days might be numbered.
As improving economic conditions soothe the nerves of jittery
consumers, luxury home-building company Toll Brothers Inc. (TOL) is
reducing incentives and raising prices "in selected communities."
It isn't clear exactly where this is taking place, but any builder
that is increasing prices, instead of shaving them, and cutting
back on profit-eroding incentives signals a return to a more normal
sales environment for a sector recovering from the worst downturn
in decades.
"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," said
Chairman and Chief Executive Robert I. Toll, as the company
reported a widened fiscal third quarter loss Thursday.
Things appear to be looking up for housing. The U.S. Commerce
Department said Wednesday that sales of single-family homes soared
by 9.6% in July, the highest number since September 2008. While
that information has a high margin of error, it comes as existing
sales climb and builder confidence improves.
Toll isn't the only one adjusting its strategy. Eric Elder, a
spokesman for Ryland Group Inc. (RYL), said "incentives are pulling
back" and prices are stabilizing in most of its 28 markets
nationwide. Meritage Homes Corp. (MTH) is building smaller and
more-affordable homes with fewer upgrades, leaving less room for
big-ticket specials.
"We can maybe deal a little bit from here, but we're not
offering a $50,000 incentive package on a $200,000 home," said
Brent Anderson, vice president of investor relations for Meritage,
based in Scottsdale, Ariz. "It was easier to offer incentives when
the market started to turn down because we had all this existing
inventory that was built with lots of extras."
Of course, numerous headwinds remain, and there is the potential
that Toll, which builds some of the sector's priciest units, could
find itself again ponying up freebies and cutting prices should the
market's decline return.
"This is good news for Toll, probably good news for the
industry," said Joe Snider, vice president and senior credit
officer with Moody's Investors Service. But "many companies in many
industries try raising prices after coming out of a downturn, only
to have to roll them back because the price increases don't
stick."
Unemployment in the U.S. remains elevated, adding to the supply
of foreclosed homes flooding the market. Home-building companies
are having trouble competing with these bargain-priced
foreclosures. And there is concern that the government's federal
tax credit of up to $8,000 for first-time home buyers is pulling
business forward, which could lead to a softened market after the
credit's Dec. 1 expiration.
Horsham, Penn.-based Toll said that, while its third-quarter
results reflect continuing challenging market conditions, there are
"signs for optimism," including more solid demand and declining
cancellations as fewer buyers abandon deals.
Toll reported that, four weeks into its fiscal fourth quarter,
its non-binding contracts are running 26% ahead of the year-ago
period. Credit Suisse expects a 25% increase in fourth-quarter
orders. The home-building company previously said net orders,
surprisingly, rose 3.1%, although they declined 4.7% in dollar
terms. The cancellation rate fell to 8.5% from 19% a year
earlier.
Toll, one of the industry's few known brands, now expects to
deliver between 2,580 and 2,830 homes in its current fiscal year,
up from its June view of 2,200 to 2,800. It could deliver between
475 and 725 homes in the fourth quarter at an average delivered
price of $550,000 to $575,000 apiece.
Credit Suisse analyst Dan Oppenheim said he "would not be
surprised to see Toll increase its community count in 2010 to take
advantage of the improved demand."
Before the market opened Thursday, Toll said its fiscal
third-quarter loss widened sharply on tax charges and write-downs.
For the quarter ended July 31, it lost $472.3 million, or $2.93 a
share, compared with a loss of $29.3 million, or 18 cents a share,
a year earlier.
The latest results included federal and state deferred-tax asset
valuation allowances of $439.4 million, and charges of $115
million. Excluding charges, Toll reported a pretax profit of $3.7
million for the quarter, compared with year-earlier pretax profit
of $84.6 million.
Earlier this month, the company said revenue decreased 42% to
$461.3 million.
"When it's all said and done, we view the quarter positively
overall," noted Michael R. Widner, an analyst with Stifel Nicolaus
Equity Research.
Shares of Toll Brothers, which have gained more than 25% in the
last three months, recently traded down 12 cents at $23.02. The Dow
Jones U.S. Home Construction Index recently was down 2% at 302
points.
-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193;
dawn.wotapka@dowjones.com
(Joan E. Solsman and Colin Kellaher contributed to this
report.)
