Speculators ‘Trying To Unload Homes’: Toll
The Philadelphia Inquirer has this report on Toll Brothers. “The chief executive officer of Toll Bros. Inc. acknowledged yesterday what many in the housing industry have long feared. Speculators helped fuel the housing boom, and now they’re trying to unload homes in a weakening market.”
“‘In 2005, demand for new homes in many markets was propelled to unsustainable levels by speculative buying,’ Bob Toll said in a quarterly earnings conference call. ‘We are now on the other side of that slope.’ Some regions have experienced more speculation than others, Toll said, mentioning Washington, Las Vegas and Orlando, Fla. He characterized the Philadelphia region as holding steady.”
“It is troubling news for a housing market that has been hurt by rising interest rates and a growing inventory of unsold homes and condominiums. Data from the NAR show that the number of unsold existing homes last year rose 524,200, to 2.5 million, as more people tried to sell homes than there were buyers for.”
“The number of existing unsold condos rose last year by 135,000 units, to 483,500. The numbers do not include new homes or condos.” “(Economist) Mark Zandi said that the housing market peaked last summer and that a correction could last three years. ‘It does not feel that this market is crashing; it will correct,’ Zandi said, noting that he expected home prices to decline in many places. In the most overpriced markets, declines will range from 10 percent to 15 percent, he predicted.”
“Toll Bros. had reported earlier this month that contracts for homes it would build later this year fell sharply in the first quarter, reflecting the weaker market. Toll Bros., of Horsham, said yesterday that it believed its rate of cancellation, people backing out of signed contracts, had peaked in the first quarter.”
“Toll Bros. said it had repurchased one million shares this month. As of Jan. 31, it had 167 million shares outstanding.”
“William Mack, an equity analyst with Standard & Poor’s, said maintaining past growth will be tough for home builders as the housing market continues to cool. Robert Toll told analysts ithat he expects business to stay in good shape even if home prices fall.”
“‘We have enough cushion between the price of the land and price of the home..to build lower-priced homes. But that’s not our interest,’ he said. ‘Our interest is to adjust to higher-priced homes if we can.’”
“California showed the only decrease in performance, down 16 percent. But the picture is different with signed contracts, down 21 percent overall to $1.14 billion. All regions showed declines in signed contracts.”
“Toll Bros., of Horsham, said yesterday that it believed its rate of cancellation, people backing out of signed contracts, had peaked in the first quarter.”
Does he really believe this? Sorry Mr. Toll, this is just the tip of the iceberg.
Just the beginning of the long ski ride down to the bottom of the mountain…
TOLL BROS. INTERNAL MEMO:
Keep that share price UP at all costs so Mr. Toll can diversify.
Failure to do so will cost you your job.
Mr. Toll can just sell the company at book value and buy an island some where (maybe a small one…an a-toll, hey a pun!) and take it easy. The guy is stinking rich after this housing bubble if you have followed the amount of shares he has sold off. Why should he bother working through the tough times ahead when he can be sipping cold ones and playing golf?
Because greed begets more greed.
HB stocks look rather plungy this morning — their prices are moving rather like the end of a diving board just after a 300lb man has jumped off…
10-15%, in the most overpriced markets?
That is a joke. There are already documented instances of 10%, apples-to-apples declines in the DC suburbs. So I guess we’ve hit bottom….
“‘It does not feel that this market is crashing; it will correct,’ Zandi said, noting that he expected home prices to decline in many places. In the most overpriced markets, declines will range from 10 percent to 15 percent, he predicted.”
Trouble is, crash is not a well-defined term. If one is looking for a big one-day event, like October 19, 1987, then I imagine you will never see it in historical data on housing prices. But if you define a crash as a significant decline in prices over an extended period, then the 1990-1996 period in SoCal will do just fine. I think this history is already repeating itself, and his 10-15 percent is simply too small to unwind the 200%+ worth of irrationally exuberant appreciation the hot bubble markets have seen (in my humble opinion, of course!).
I wonder how long it will be before these morons start admitting to greater percentages of price declines? I think prices will at least drop by half (on average, of course), in metro DC.
They won’t what was the line in the Money Pit. Everytime Walter asked how long something would take.
Walter: When I do get the permits, how long will the job take?
Curly: Two weeks.
Walter: Two weeks? Two weeks?
Every year for the next 3-5 years the qoute will be 10-15%.
I am actually surprised to see a NAR economist make any statements about declines. Over the past couple of months they have stuck to a 5 to 10% increase statement.
Like the saying goes - If you lose your job, it’s a recession. If I lose my job, it’s a depression. Perspective, perspective.
Zandi has been behind the housing curve for the last 2 years. Until now, I don’t recall him ever saying prices would decline anywhere.
I tnink a lot of smart money has already bailed from the market. Now the greedy are going to get screwed. They held out in hopes of continued value but waited too long. Now everyone and their brother is”all aboard” to get out. I have learned to sell into strength and take a decent profit and not try to maximize profit by looking for tops. All I can say is the inventory here in metro arizona is getting ugly quick.
Couldn’t agree more. When selling, it’s always best to leave a few crumbs on the table for the buyer.
I second that thought. The same applies to San Diego. The true smart money has bailed out for the most part and diversified into a different asset class. The greedy are unwilling to price their properties right. But at this point, you may as well price them really low because not much is moving right now. They can price their listing way below the market now or price it with the market, take up the rear for a year or two and then get the low price that they should have used in the first place.
An old man, asked how he got rich, said, “I alwayst sold too early.”
They’ll put that on my tombstone. I operate scared all the time and sell at the first sign of a downtick when in a profit position.
Problem is, a lot of these sheep that bought in 2005 are not in a profit position anymore.
The black monday of the stock market in 1987 is on schedule to make a repeat in the RE markets, only in slow motion.
RE speculators only have two choices: sell their properties at any prices to cut the loss, or enjoy the negative cash flow year after year while watching the prices free falling with no buyers.
Too bad for sellers that there are no electronic circuit breakers for RE similar to the ones which ended the Black Monday route on Wall Street.
Buyers in states such as California (if, big if, they’ve been careful, have exactly such a circuit breaker. It’s called a non-resource mortgage.
Most of these newbie “speculators” don’t have any cash to bring to the table if they were to sell at lower prices than they bought at. What will be the alternatives to them when they can’t or aren’t willing to carry the negative cash flow
property(s) any longer? Foreclosure and loss of credit worthiness (seems to easy on them)? or do they have to tap into other assets and be forced into bankruptcy? This is a different than losing money in the stock market where you either owned your shares outright or were still on the hook for any margin loans. Most of these speculative properties are debts being financed by lenders, not actually assets of the individual speculator.
From the update:
‘William Mack, an equity analyst with Standard & Poor’s, said maintaining past growth will be tough for home builders as the housing market continues to cool. Robert Toll told analysts ithat he expects business to stay in good shape even if home prices fall.’
‘We have enough cushion between the price of the land and price of the home..to build lower-priced homes. But that’s not our interest,’ he said. ‘Our interest is to adjust to higher-priced homes if we can.’
‘California showed the only decrease in performance, down 16 percent. But the picture is different with signed contracts, down 21 percent overall to $1.14 billion. All regions showed declines in signed contracts.’
“Our interest is to adjust to higher-priced homes if we can.”
Of course, because they’re greedy b@stards. But if it comes down to it, they will drop prices and undercut the speculator, because they can.
See, they bought the land years ago and could sell for years ago prices and still make plenty of money, and they will do just that if they have to (they will). So anyone who thinks the builders will get screwed is wrong. The speculators will get screwed.
That’s really interesting. These guys had a good idea of what will transpire years ago. Buy land, hype up real estate to get the speculators on board, and once the pain starts, sell houses cheaper than the speculators and make a profit while they take losses.
It’s like a chess game to them. I they will win. Speculators that have not got out of the game by now will lose.
‘We have enough cushion between the price of the land and price of the home..to build lower-priced homes. But that’s not our interest,’ he said. ‘Our interest is to adjust to higher-priced homes if we can.’
Of course that is your “interest”, Bob. However, your reality will most likely be selling lower-priced homes, and probably not all that many of them.
‘…housing market that has been hurt by rising interest rates’
Boy, rates are 2 % under historical averages and the roof is falling in? What next - Toll Brothers back to building homes for people to live in, instead of shiny baubles full of granite to invest in?
I have to agree. While higher rates have hurt mortgage brokers by squeezing profits, the rates paid by the ultimate mortgagor have remained fairly constant and low. To attempt to blame rates for the slowdown this early in the game is ridiculous. Affordability and the fact that so many properties are valued at so much more than people are willing to pay are the real culprits.
When you run out of greater fools and people begin to make rational decisions regarding the purchase of real estate, the price escalation of the last five years is unsustainable.
Need a secretary? My friend’s ex-secretary who left to become a “mortgage broker” is now begging for legal work again having made no sales in 2+ months. LOL
It’s worth stating that mortgage rates have NOT risen in any material way in the past year. Yet sales are falling, dramatically, in some localities.
This thing appears to be collapsing under its own weight. There still may be a “pin” floating around out there - if and when it finds our bubble, look out.
Wow, you must really like drama, I’d call a 11%-28% (depending on which rate you are measuring) year over year increase a material increase, but if not perhaps you would like to take a look at my not materially different mortgage rates or investmanagment fee structures. Both taken from the FRE PMMS rate archives (2/17/2005 to 2/16/2006).
When you look at Freddie Mac’s statistics for a 30 year fixed at a period longer than 1 year, you see that rates have hovered between 6.54 (2002) and 6.15 (Feb. 2006). 2005 average was 5.87. Currently, Bankrate.com has 30 year fixed at 5.80. So claiming rates have been hovering in and around 6% for many years isn’t far off the mark and claiming that the housing market is being hurt by rising rates is a red herring IMHO.
Of course, I’m just a casual observer and I’m sure you’ll pull out some stats to refute my claims. As a potential buyer, however, it’s not the rates that are keeping me from buying a house, it’s the friggin’ price and what I’m getting for my hard earned money - which, currently isn’t much.
RudeKarl - I’ll take your casual observation over that other guy “Bluto?” I was trying to point out, as you have, that we have not had an interest rate shock. 1/2% is nothin’ man.
I do not like McMansions I believe they cheapen an area. However, Toll Brothers is one of the more responsible companies - they at least make an attempt to keep the public informed of the companies actions, of the market conditions and what their best guess is for future conditions. Also in Illinois they use union labor which is a good thing. It does not mean that there is no bursting bubble. Just that there is not enough evidence from current market conditions to categorically affirm a bubble basis. That I believe this is an exploding bubble and that lower wages, rising real estate inventory, falling consumer purchases, etc support a bubble collapse does not make the bubble collapse true. BUT IT SURE AS HELL SUGGESTS IT.
“Just that there is not enough evidence from current market conditions to categorically affirm a bubble basis.”
This just means that you have not done your homework. I have, and trust me, there is plenty of evidence. In fact, we don’t need any more evidence. I already know how this is going to end, I’m just sitting back watching it unfold exactly as I’ve known for a while now.
I personally agree with you - however as has been pointed out on this blogand others. A bubble is not confirmed until after the fact. Prior to confirmation it is in AG speak excessive exuberance or froth.
“…to date, economists have been unable to anticipate
sharp reversals in confidence. Collapsing confidence
is generally described as a bursting bubble, an event
incontrovertibly evident only in retrospect.” — Alan
Greenspan, August 27th 1999
Oh, well if Alan Greenspan said it, then I guess that makes it the Gospel truth…
I believe there is a housing bubble also, but here in Portland Oregon people keep buying. I have friends who I have metioned this too, but they just laugh and tell me that there is no way that a bubble will reach Portland. Does anyone have any evidence of a bubble here in the northwest, i haven’t really seen one.
Let the bubble burst, and take down the flippers (oh, I mean investors) with it. CA has a LONG LOING way to go down. Hope they increased the number of BK courts (oh, I forgot, it is much harder to discharge debts with new BK laws) - so, maybe they will need more police to stop stupid crimes by desperate flippers.
Anyone for a laugh? In ABQ, they showed on the news some idiot that was stuck in a chimney as he tried to go in and rob it. The fire dept had to demolish the fireplace to get the dude out. Some petty criminals are desperate, and more will become so, as time goes on.
Wouldn’t you just be a teensy bit tempted to build a nice hot fire . . .
Finally, a report that shows that this “recovery” has not been a recoverey after all!
http://www.nytimes.com/2006/02/24/business/24wealth.html
8-D
“People are living longer and longer, so over time they’re going to be draining their retirement accounts,” said Gillette Edmunds, an investor and author, with Jim Keene, of “Retire on the House: Using Real Estate to Secure Your Retirement” (John Wiley & Sons: 2005.)
“The only thing they are not draining yet is their houses,” Mr. Edmunds said, “and that’s what they’re going to have to turn to.”
That sounds like a safe bet to me…
“They use it more like catastrophic insurance,” said Steven F. Venti, an economist at Dartmouth College. “It’s not a means to finance day-to-day consumption.”
Insurance is supposed to pay claims in the event of a catastrophe, not lose you money. Too bad this form of catastrophe insurance would lose value in the event of a catastrophe — just ask some NO residents if you don’t believe me. This sounds like the worst possible diversification strategy.
Ahem, the houses have already been drained by HELOCs.
HOZ: Mr. Toll is not stupid. This past summer when he was wowing the public in I beleive Fortune Magazine with how “housing as changed and he sees this demand continueing for at least 10 years” he and his exec board were unloading shares of Toll Brothers.
They knew along with all the other builders when the peak would be. These builders have been in business a long time.
Home building industry works like this… wait for the boom, build like crazy, gauge when it will come to a close and prepare for the down turn. All the while tell the public and investors how great things will be to make sure you get out before everyone else does. Then scale back production, lay people off and wait for the next boom.
The business definitely is cyclical. Builders like Toll can still make a profit with 40% price declines. Personally, I would rather pay a 5 to 10% mark-up for a new home than a 50%. So I am waiting for the other side of the cycle. Buyers can play this game too. You just have to be patient.
Don’t forget about the CYA remarks once a cyclical downturn is imminent.
smart builders make a pile during boom times, but still make money in the down times. they also buy a lot of land for the next upturn. read recently that over the long haul large builders average 10% margins, but for the last few years it has been more like 17%. Also, typically on any home they are making 30% or so mark-up, so they’ve got plenty of room to discount.
i’m sure they’re just working the calculations about cost of money to hold vs. discount.
eventually they’re need to clear out inventory, but i’m sure that won’t be for a while (late 06?)
I have a brother who is an executive for a major national home builder, a son in construction and i have been in finance for over 30 years. Personally my pipeline (loans to obtain) is larger than last year which was larger than the year before. I AS I SAID - I believe this is a bursting bubble -
BUT UNTIL IT F”N BURSTS AND THE EFFECTS ARE DOCUMENTED
see AG”S comments which I agree with.
“…to date, economists have been unable to anticipate
sharp reversals in confidence. Collapsing confidence
is generally described as a bursting bubble, an event
incontrovertibly evident only in retrospect.” — Alan
Greenspan, August 27th 1999
What area?
A NAR economists says “decline”. Un-effing-believable.
HOZ,
First of all, what is the relevance of your friends and family all being in the various tentacles of the RE/mortgage lending industry? I don’t care if your father was the investor of all things real estate — this is still the most rediculous bubble since Tulipmania.
And second, clearly your desperation to get us to stop using the “B”-word expands geometrically with each time you paste your favorite AG quote. I like Greenspan quotes too. Like this one:
“Recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.” - Alan Greenspan, February 23, 2004
Oc -I enjoy your comments, I AGREE that I BELIEVE WE ARE IN A BUBBLE. I sent in a light hearted week end topic to Ben once Questioning whether the laws would allow us to tar and feather realtors since it was illegal to kill them. The article I sent him was in reference to an individual who killed a realtor and in the alleged killers words. “I just wanted to look at a house”.
I am a fence straddler. I do not have a vested interest in a collapse or a boom - neither should directly impact me. And I use the “B” B*tch, B B*bble word, and assorted other “B” words. LOL
I believe there is a huge bubble! However I am not Lemming enough to constantly espouse selected data to “have, and trust me, there is plenty of evidence. In fact, we don’t need any more evidence.”
THERE IS (at this time) selected reference points of data that can be a bursting BUBBLE or a minor correction to new highs. I am not smart enough to know which it is. I keep an open mind and I recomend that you should too. Otherwise you become just as obnoxious as the “sheeples” buying overpriced condos - you become a sheeple to a bubble burst. Neither is good for financial well being.