Toll Brothers ‘Now On The Other Side Of Speculative Slope’
The homebuilder Toll Brothers has some numbers out. “Toll Brothers, Inc., today reported that, for its first quarter ended January 31, 2006, net income rose 49% to $163.9 million; revenues rose 35% to $1.34 billion; first quarter-end backlog rose 22% to $5.95 billion; and signed contracts of $1.14 billion declined 21%, compared to FY 2005’s record first quarter results.”
“Robert I. Toll, CEO, stated: “In 2005, demand for new homes in many markets was propelled to unsustainable levels by speculative buying. We are now on the other side of that slope. Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions.’”
“‘Markets such as metro Washington, D.C…will need to work through their excess supply before the imbalance once again tips in our favor. When that happens, we believe builders such as Toll Brothers, who control the largest share of well-located approved sites, should prosper.’”
“In terms of units, (signed) contracts fell to 1,544 homes from 2,173 last year.”
More data to justify the bubble has popped and we are on the downhill side of this beast, caveat emptor. I’m going to ride this out for awhile and see what happens. I’m feeling good about my decision to rent right now.
Fannie Mae report has been released.
http://biz.yahoo.com/ap/060223/fannie_mae.html?.v=8
Nice that they could stick the blame on former employees, thereby exculpating all current employees or board members.
I guess that was good enough to push Fannie up 3%.
It would have been nice if Mr. Toll gave us his perception of how long it will take the Washington area to work through its speculative excesses. He left a lot of room for this to unwind in the next 3-6 months or 3-6 years. I personally think much of the reported backlogs are just speculators that will walk away from their deposits rather than take ownership of a depreciating asset. I think speculative activity is still much higher than normal and it wont be until we see YOY price depreciation that the novice speculators wake up and realize that housing doesn’t always go up. I expect to see YOY losses in the DC area mid summer ‘06. Currently there are a lot of people that think that this is just a seasonal slowdown.
NOVA Inventory 3/1/05=2545
NOVA Inventory 2/22/06=11764 from virgininamls.com
This doesn’t take into account inventory beggining to pile up at all of the homebuilders or the hidden inventory of speculators waiting until spring/summer to list. I think inventory will build all throughout ‘06 and prices will fall slowly. ‘07 will be when the glut of homes and adjusting ARMs really start to negatively influence prices.
See Ben’s next post for some evidence on whether prices will fall slowly (“Inventory in Ashland (Mass.) has tripled from a year go with the median asking price coming down from $529,900 to $424,900, a 25 percent drop, the aftermath of a double-digit increase in the number of homes listed under $350,000.”)
Would you consider 25% YOY slow or fast? (It only works out to a decrease of -0.0788% per day…)
GetStucco, I think 25% price drop on a property in 1 year is very rapid depreciation. The reported median price drop in Ashland, MA of 25% does not mean that if you own a house it is now worth 25% less than a year ago. It is more likely that the median house today is a 2BR condo while it was a 3BR townhouse a year ago. Median prices don’t allow for meaningful comparisons YOY if the mix of housing is changing.
Your point is taken. When the mix of homes is sliding down the quality scale towards “affordable” 2BR condos, then the rate at which high end homes are selling is slowing disproportionately to the overall market rate of sales. This makes it hard to know the market price for high end homes, as the price is hidden somewhere in the growing mountain of inventory.
” He left a lot of room for this to unwind in the next 3-6 months or 3-6 years.”
Give it fifteen years, minimum. There just will not be that many folks qualified and interested in buying luxury McMansions once this bubble pops.
I’m feeling REALLY good about renting, too. I have to admit that I was tempted last year this time to buy a home in the East Valley of the Phoenix area. I am sooooo glad I didn’t and instead sat up and took notice.
It will be interesting as this month finishes out, to see the new spec home count in the Phoenix area.
Although, I have to admit that this is all unraveling faster than even I expected, I still need to expect that this is going to be a long ride down to the bottom. So patience will be a must as I wait. I have been an avid reader and a seldom poster of this blog and thank Ben for putting it all together and for everyone’s comments.
i see this whole thing unraveling like a cheap sweater.
for example:
i’ve heard all the arguments about liquidity and how it might take years to see the bottom but i have several friends and fam involved and they’re all leveraged to the gills, the first (painfully obvious, punch-in-the-face) sign of trouble and there will be a mass exodus.
Million,
Good find. No one’s running for the door but they’re starting to walk very fast. I’m sure similar ads like this are soon to come.
N VA- presidents day marks high season, this ain’t NE- mild weather no excusses here
Either everyone from Ben’s Blog has been hitting finance.yahoo.com or the general public is begining to believe there is a bubble.
http://post.polls.yahoo.com/quiz/financeresults.php?poll_id=12173
Well, that’s a contrarian indicator. Too bad I purchased my PUTs yesterday… ;(
“Robert I. Toll, CEO, stated: “In 2005, demand for new homes in many markets was propelled to unsustainable levels by speculative buying. We are now on the other side of that slope. Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions.’”
Whatever criticism anyone may have about Robert Toll being overly bullish should certainly be blunted by the above statement. The man has basically announced loud and clear that the bubble is over. But why does Toll stock price wear a teflon coat in the face of such an honest and dire warning from the CEO himself?
Has the Plunge Protection Team deamed Toll Brothers “too big to fail”, in the sense that they are the poster child for the Housing Bubble? (Thank you in advance for not offering subjective opinions on my questions which are unsupported by factual evidence.)
Well after extracting over $100 million out of the company via stock options last year, Bob can afford to tell it like it is now. Last year abou tthis time he was on CNBC saying he was going to screw the shorts. The shorts last year, the shareholders this year. BFD for Mr. Toll.
The P/E still makes the stock rather cheap. Most don’t believe new houses will stop selling, if anything they will just sell for less. I really can’t guess if there are an overabundance of houses out there, but most of the bulls claim population increase.
Once that P/E starts increasing TOL will drop.
Beantown - It is counterintuitive, but P/E ratios for “cyclical” stocks tend to the inverse. That is to say, their P/E’s are usually higher during economic downturns, and lower during booms. When the “look cheap,” it is usually wise to hold on to one’s wallet.
Part of the argument that Toll and its boosters are putting forth is that housing is no longer a cyclical industry, per se, and that earnings will not be impacted by slower sales. In other words, “it’s different this time.” We’ll see.
The stock is rising, Getstucco, because there are more buy orders than sell orders. Every time you raise the issue of government bureaucrats buying this particular stock, I remind you that Mr. Toll has instituted a perfectly legal and fully-disclosed share buy-back program. Toll Brothers, Inc., is buying the stock, not the government.
Also on a 5% rise the previous day a lot of shorts who have SOLD borrowed stock may get nervous and re-purchase their shares, further raising the price.
IE: Short squeeze. And I hate getting squeezed in the shorts.
Bob Toll is a shill - he has to be; it’s the nature of his job - but he’s a bear not a bull, as his stock sales unequivocally confirm. He speaks with the honesty of a man who has cashed his chips, picked up his coat and hat, and feels free to announce that the party’s over on his way out the door.
Good one, and this reminds me of something about which I am admittedly ignorant: Why does it make sense for Bob to cash in millions upon millions of his own chips, while having the company buy back shares? Does the right hand know what the left hand is doing in this case?
It makes sense for old man Bob to sell at what he probably understands as the top of the final boom of his working life. Directing his company to buy back shares (with authorization from the Board of Directors, of course) supports the stock price in the near term, and retires shares from circulation, allowing those left outstanding to soar in the next upcycle. We are all responsible to ourselves, foremost, and those of us running publicly held companies are responsible to shareholders, after we’ve paid ourselves, right?
Nice rationale, but if he is supporting the stock price and helping share holders prepare to profit in the next upcycle, isn’t it rather like shooting himself in the foot by cashing out his own holdings, just before the shares soar again?
You would think so, but, he’s sold out his position at or near the top. The company buy-back only supports the stock near-term, at the cost of very high cash burn. Medium term, the stock tanks. I bet it’s a $10 stock six months out, and goes sideways for several years. Toll will probably survive the donwturn, then, all aboard!!!
Your scenario looks similar to my best guess, except why don’t you think TOL will go all the way to bankrupt, once all that land in their inventory sinks their balance sheet when its value goes down with the housing market that supports it?
I know Caveat Emptor means Buyer Beware… what’s the Latin for Buyer Bend-over?
Vergeat Emptor?
do you think we can get them to rebuild Iraq?
Why not rebuild NO with antebellum-style Southern mansions?
I was just considering writing them a letter and imploring them to add more energy-saving features to their homes. Robert Toll has said in the past that they have to stick to their business model (the “Mc” in McMansion) but I was so hoping that this D.C. downturn would make him innovate a bit on the design of the homes.
Even McDonald’s recently started offering greater energy-efficiency — you can find many more low-carb offerings on their menu in the post-Super-Size-Me era. (Soon to be downsized in the wake of the bubble-collapse: Automobiles and homes.)
It is difficult to build McMansions with IIDs going off all over the place.
Oops — I meant IEDs!
do you think we can get them to rebuild Iraq?
No… I think that was awarded to the Bluth company, which I am definitely getting in on as Kramer recently upgraded them to Risky.
Yeah, the Feds exonerated them from any wrongdoings, thus, upping their prospectus to ‘risky.’ It was a good piece of news for teh Bluth Co., but looking closely at their cupboards.. tehy were bare. Not much time left before tehy go under, unfortunately.
LOL! Love that show.
While I’m sure the comment was tounge in cheek; I don’t think Iraq has any shortage of housing, with more than 100,000 people having died violent deaths and many more have fled the country. Iraq needs infrastructure rebuilt, electrical, water, sewage etc. Less Iraqis have access to potable water and electricity than prior to the US invasion.
Before making that statement abut Iraqi housing situation… should we check to see what their housing stock is? Afterall, I am sure a bunch of homes have been destroyed over the past 2 years… if not by the US and coalition forces, then by insurgents.
They should certainly have a shortage of cars… after blowing every other thing with wheels up already. Do you recall the donkey cart turned into a mobile rocket launcher?
Does anybody subscribe to US News & World Report? There, in the money section I’ve read that the TOL report is a sign of RE rebound. They haven’t reported the decline in contracts.
bold