‘Fairy Dust Is Floating Away’ For Toll Bros.
The financial media is reacting to the Toll Brothers guidance. “If you don’t think the housing market has cooled off dramatically, just ask Robert Toll. ‘Selling homes this first quarter was certainly more difficult than one year ago,’ said CEO Toll. He noted that ‘we experienced softening demand in a number of markets.’”
“Toll Brothers, the largest U.S. builder of luxury homes, said fiscal first-quarter orders plunged 29 percent. ‘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. Toll’s shares fell as much as 5.8 percent and dragged other homebuilders lower. Toll’s stock has lost half its value since July on concern sales of its $700,000 houses will be hit harder by rising mortgage rates than cheaper homes.”
“In a fresh piece of evidence that the housing market is cooling, homeowners paid off their mortgages at the slowest pace in almost three years, Washington-based Fannie Mae, the biggest home lender, said today. ‘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.”
“U.S. homeowners paid off their mortgages at the slowest pace in almost three years as rising prices and interest rates cooled the housing market and builders reported declining orders. ‘Rising rates have taken their toll’ on consumer refinancing to turn home equity into cash, said Akiva Dickstein, head of mortgage research at Merrill Lynch in New York. ‘The housing market is showing some signs of slowdown, and Toll Brothers is evidence of that.’”
Even the Motley Fool is catching on. “From Q4 2004 to Q5 2004 the number of vacant homes increased by 427,000, with vacant for sale up 191,000 and seasonal vacancies up 245,000. With speculation by property flippers, vacation home buyers, and retirement home buyers driving demand for new homes, it is not surprising that the nation produced far more homes than were needed for habitation in 2005. All this is leading to a supply glut that finally is impacting prices.”
“Builders loaded up on far too much land (and debt) in recent years and are rushing new developments onto the market in a futile race to unload it before prices fall too far..It isn’t surprising that if you build a house where there is already overcapacity you might have a hard time selling it.”
“NAR estimated inventory of 2,796,000 existing homes for sale, or a 5.1-month supply in December, which is up by 582,000 (26.3%) year over year. A vacant home is a large cash drain on whoever is stuck holding it.”
“Investors in homebuilders, with too much debt and land on their books, and investors in lenders, with too many high risk loans on their books, will be left with substantial losses.”
Ya know, I seem to recall an article from a year or more ago with quotes by various home builders who claimed that the overbuilding of the 90s could not happen again because of x,y,z. It would be fun to dig that article up and shove it down their throats.
Just for the memories….check out this report of insider selling back in July….ol’ Bob made off w/ $100 million!
http://money.cnn.com/2005/11/09/news/fortune500/toll_brothers_stock/
“A vacant home is a large cash drain on whoever is stuck holding it.”
I thought cashout refinancing solved that problem.
from motley fools:
“On top of this, the US economy faces additional challenges in the form of unsustainably high government deficits and a $700 billion trade gap. Simply easing credit would likely lead to a rapidly falling dollar and rising inflation. That may happen anyway, if foreign investors decide that roughly $10 trillion in US debt is more than they want to hold. In the end, inflation may be what ends the cycle of falling home prices.”
And a conspicuous running of the printing presses by BB would result in a big spike in the long bond yield which would spill over into mortgage rates. The housing bubble is toast no matter how BB plays his hand.
I see that the prevailing theme throughout these quotes is that rising rates are one of the main causes for the slowdown. While I would agree that rising rates should affect sales, I haven’t seen that the fed’s increases have done much to the overall 30 year fixed rate. I haven’t looked lately, so correct me if I’m wrong.
My own personal reason for not buying is that prices are way out of whack, and have been so for a number of years. I never bought into the buy now or be priced out forever nonsense. I figured that if I couldn’t comfortably afford a reasonably outfitted house with what I earn, then I will continue renting. I’m not going to stay up at night wondering how I’m going to make the monthly mortgage payment, or hope that prices will continue to get crazier to fool myself into getting into some stupid option ARM that has the potential of financially crippling me in a few years if prices don’t go up.
I’ve got pretty much everything I need, and don’t need the plasma, et al to impress the friends. For me, prices kept me out of the market, as I think they are keeping a lot of people out now. Plus, once the herd gets moving in the other direction, it’s going to be hard to sell any of the growing inventory.
Bill O Reilly is always saying how Exxon is making so much money each quarter how come they, Exxon, don’t spent more of their profits helping our servicemen when they return for medical care from Iraq or Pakistan if they need it.
One could also make a food case if Toll has all these empty homes they can’t sell and Bob took 100Mil last year why not give away some Toll homes to returning Vets who need it.
Toll Brothers is one of the more responsible companies in reporting its financial position. This is the second time that TOL has lowered its forecast. What I find incredible is that the financial analysts who are supposed to be aware of the housing industry have shown how clueless they truly are - Merrill Lynch removing TOL from a Buy to a Hold . Any reader of this Blog would have been more astute.
marinite:
I recall one interview w/ Toll in Fortune about a year ago where he was quoted extensively saying it’s different this time. Toll compared U.S. and especially eastern seaboard to Japan and Europe and said prices would only go up and 100-year mortgages were the wave of the future.
Glub-glub, Bob.
(Ya know, I seem to recall an article from a year or more ago with quotes by various home builders who claimed that the overbuilding of the 90s could not happen again because of x,y,z. It would be fun to dig that article up and shove it down their throats.)
yep, they had learned to be mean and lean from the last recession, they’d consolidated and learned the lesson of overbuilding. something about them also being diversified or maybe just regionalized, one of those, probably both were said!
Rudekarl: todays 30 year rates fixed w/ FICO mid score 720 (Par pricing no Yield spread premium to the LO) is 5.75% for conforming and 6.125% for Jumbos; 620 FICO 5.875 & 6.25% .
People were standing in line when the interest rate first dropped below 7% (My first house was at 9.5% mid ’70’s)
How errily similar to the dot com implosion this is becoming. The canaries are gakking in their gilded cages, and the band plays on and on. Oh when oh when will Time magazine do their ‘Death of the Housing Miracle’ hard-hitting special report?
Thanks Hoz - with rates still hovering around 6%, the rising rate excuse seems like a red herring.
The reality is we’re running out of greater fools, and the speculators are leaving the market in droves if they can sell.
slo-ca Says:
“Toll compared U.S. and especially eastern seaboard to Japan and Europe and said prices would only go up and 100-year mortgages were the wave of the future.”
He also said that folks in their 20’s and 30’s would start to move in with their parents, so that they could save and someday get into the market. And the great thing about it was he didn’t think there was anything wrong with that.
“Oh when oh when will Time magazine do their ‘Death of the Housing Miracle’ hard-hitting special report?”
To be scheduled concurrently with Congresses’ hard-hitting hearings to get to the bottom of who created this mess.
I live in NJ and a “Toll” Project just recently raised home prices and suspended incentives which they were offering in Dec. The sales person said she has had no problem selling homes. I wonder what she knows that her bosses do not?
P.S. - She stated from purchase to delivery would be 14 - 16 months. She had no comment on where interest rates would be.
100-year mortgages will never be the wave of the future.
Why? Because with interest rates at a sustainable level (I’d guess 8.5%), your monthly payments only drop 9% compared with a 30 year loan at the same rate. But just like the additional premium added to the rate of a 30-year when compared to a 15-year loan, rates for 100-year loans will be higher, probably negating any savings.
People only start talking about 40-100 year loans when interest rates are very low, and the payment difference between those and a 30 yr is significant. The problem is that it’s hard to make money lending money for that long. No matter how many innovative securities you put in the middle, somebody somewhere needs to think it’s a good idea to tie up their capital for 100 years. And so they will compare that return to the average of what they get elsewhere, which is around 7-10% (S&P 500 over 100 years, about).
The only reason 100 year loans were ever popular in Japan was to avoid inheritence taxes, because then taxes would only be paid on equity. As long as we have people like GW looking out for his friends, that won’t be a problem here.
Interest Rates are absolutely a red herring.
Just as aerospace layoffs in the early 90’s in So Cal were as well.
Exhaustion and running out of greater fools is the real issue.
The MSM and humanity always look for exogenous events to blame bad fortune on. It is a survival strategy leftover from the time we humans were a tasty, less hairy meal for predators.
The reality is we’re running out of greater fools, and the speculators are leaving the market in droves if they can sell.
Bingo!
I was and still am one of those pollyannas that think the HBs won’t be totally screwed. Their stock is screwed, their 2000-2005 customers are screwed, some partners and some suppliers are screwed and they themselves have some serious mortgage exposure. That mortgage exposure is, however, for a $200k house they sold for $400k. They’ve been sucking sucking double interest and they still get back a house they can resell for $350, $300, $250, $200, even $150k and still make a profit on the entire deal. A lot of their land is “optioned” meaning they can take a haircut without getting scalped. Their balance sheets are going to look really crappy when their $80k/acre land is called $30k/acre land -but- it is still the same buildable land. They are in the building industry after all. Does Neumont look screwed when gold flucuates? Only against the unreasonable stock market valuations, they still remain an ongoing concern. Same with the HBs.
Bob Toll should be tarred and feathered.
The insiders cashed out of tol last year– big time. As with the dot.bomb, the small investors are left holding the bag.
““Investors in homebuilders, with too much debt and land on their books, and investors in lenders, with too many high risk loans on their books, will be left with substantial losses.”
************************************************************************************
Short sellers in homebuilders, with too much debt and land on their books, and short sellers in lenders, with too many high risk loans o their books. will be left with substantial profits!
Robert Coté Says:
“I was and still am one of those pollyannas that think the HBs won’t be totally screwed.”
***************************************************************************************
But the HBs are still building new houses while the inventory of existing houses is soaring. Do you believe in the law of supply and demand? It seems to me that house prices are going to come down in a big way while sales are falling significantly.
Don’t be fooled by last quarters results. Most large public corporations keep a few goodies in reserve to avoid having to report too weak a quarter. But it gets harder the next quarter and even harder there after. So I expect that the next 3 months will exhaust all the goodies in their cookie jars and we will see dramatically down quarters thereafter.
Why would someone buy a home today that was priced $150,000 higher yesterday when those who bought at the higher price yesterday are mostly upside down now? How many of those upside downers will be foreclosed?
Surely there aren’t enough greater fools to keep HB sales up to current production levels.
My guess is that the first of the large homebuilders to go bankrupt will do so within a year.