Glut Created By Speculation And Cancellations: CEO
Toll Brothers has the latest numbers out. “Toll Brothers Inc. lowered its earnings forecast for the fiscal year, a further sign of the slowing U.S. housing market. While the economy remains healthy, the new-home market is beset by a glut of units created by investor and builder speculation and buyer cancellations, CEO Robert Toll said.”
“‘Demand, while obviously diminished, has not disappeared,’ he said. ‘We believe many customers currently feel a lack of urgency to purchase due to their uncertainty over the direction of home prices. This has contributed to keeping many potential buyers on the sidelines.’”
“Toll said it expected full-year earnings of $4.69 to $5.16 a share, down from a prior forecast of $4.77 to $5.26, excluding items. On May 5, Toll lowered its fiscal-year sales forecast to a range of between 9,000 and 9,700 homes from a previous range of 9,200 to 9,900.”
“The sales warning, the company’s third since November, came after Toll saw the number of new-home orders in the quarter drop 32 percent, while the value of the contracts fell 29 percent. Orders fell 45 percent in Toll’s biggest market, the states of Delaware, Maryland, Pennsylvania and Virginia.”
“Second-quarter revenue rose 17 percent to $1.44 billion. Analysts, on average, expected $1.45 billion. Revenue from land sales totaled $2.1 million in the quarter, down from $9.8 million the year earlier.”
“Rising rates and record prices have cut demand at the height of the spring selling season, traditionally the busiest time for U.S. homebuilders. Orders for Toll houses, which sell for double the U.S. average, plunged 33 percent from February through April.”
“‘If builders aren’t able to achieve order volume during the spring, there’s little chance to make it up in the back half of the year,’ said Rick Murray, an analyst at Raymond James & Associates.”
“Toll’s orders dropped to 2,076 from 3,120 a year earlier, the second decline following 10 quarters of gains. The company reiterated its view that speculators are throwing in the towel and the housing market will rebound once it works its way through the excess inventory.”
And the word on the Fannie Mae report. “Federal regulators said Tuesday that their report on accounting problems at mortgage giant Fannie Mae, originally scheduled for release at 10 AM ET, will be delayed until 1:30 PM ET.”
The company reiterated its view that speculators are throwing in the towel and the housing market will rebound once it works its way through the excess inventory.”
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Keep dreaming, er… lying. The speculative demand will never come back. That was driven by investors, NOT homeowners!
40%-50% of the market was fake demand (investors). Another 20% was driven by the Cheap Money crowd (neg am loans, int only, etc..). They will not come back, unless the fed drops rates to 1% again!
“Orders fell 45 percent in Toll’s biggest market, the states of Delaware, Maryland, Pennsylvania and Virginia”
Wow and many people here haven’t even admitted that prices are falling here in Northern Virginia. Realtor types are still talking about prices leveling out until incomes catch up. Once psychology changes sales will dissapear entirely. When perpetully optimistic realtors think prices will be flat, thats a huge warning sign.
Incomes are catching up? Awesome. Had no idea I was getting a 75% raise!
Hey Gal,
I’d settle for my pay keeping up with the rate of increase in my property taxes!
Look what happened when the speculative demand left the nasdaq in 2000, poof! Who the heck wants to buy a home with all the uncertainty? Oh gee, I want to buy now and have a significant loss in the near future? I do think there are still decent buys in parts of the country but california is absurd. Phoenix also needs a good correction.
Haven’t you heard that pets.com is reorganizing, and will soon offer another IPO?
I agree that last years demand was in good part created by speculators/investors.
Having that said is it logical to conclude that:
We will have excess housing inventory in the market during the next few years? I say that there will be more housing than what real demand would require?
You know what I mean, in past few year there was over production because of artificial demand created by speculators.
If this analysis is true, it means that we will have price stagnation for years. Any thought ?
” saying that demand has slackened, but not disappeared.” Yeah, if you cut your asking price by $100,000, you will hook some fish who thinks he got a “deal”. Otherwise, poof!!!!
Speculative demand *will* return — in approximately 15 years.
Might not take that long in todays markets. We seem to move from one bubble to the next. Still trying to figure out the next hot thing myself.
kosher porkbellies.
I think quality is a good place to go now.People will pay more for quality when things get nasty. Consumer staples and drug companies might be a good place to stash some cash. Not into gold at these prices.
Looks like you’ve done your research, arizonadude.
I am paranoid as hell right now about everything. Have a little cash and just waiting for a good time to buy a home some day. I feel a little unstable not having my own house but don’t want to get screwed over either.
It seems to me, perhaps through faulty recollection, that every time the market/economy turned south in the past, the fine-art market headed higher and I saw all sorts of action at Sotheby’s and Christie’s. Wish I knew enough to invest in that stuff — as it is, I’d probably get killed.
Not so in the 1930s… (Of course, we will never have another depression, as the Fed has abolished the possibility.)
Metals and art go up in times of uncertainity. Gold may be up 100% from its recent past but I still think that it is cheap relative to other assets when adjusted for inflation.
What a joke. Prices are held back because buyers are pondering the market direction. Don’t remember Toll warning investors that prices were being propped up by artifical panic created by lying 24/7 “buy now or forever be locked out”
Builders are still making money and still building houses.
Speculators that bought a lot of specuinvestments in the past 2 years are in the house of pain.
That was a previously lowered forecast, BTW.
Part of this increase in earnings is due to share buybacks. They have reduced the number of shares o/s and now have a much lower per share factor. Once they need their cash for survival and not executive options cash outs they YOY earnings numbers will drop significantly.
I think builders can still turn a profit for some time to come. A couple years ago houses around phoenix were around 150, now close to 300k. What the hell changed for them on the cost side? Did labor and materials really go up that much? Most had bought land years ago so that was not a substantial cost. They have a huge profit margin right now.
I for one would certainly choose a new home (by a builder I could live with) if it were priced below the resales.
“They have a huge profit margin right now.”
That is why I think I that builders can cut prices, in many or most areas, way, way more than they are letting on so far. In the end, it is not forbidden that they even take a loss to move units.
The land they bought to replace the land and houses sold was much more expensive.
I’d assume that a significant amount of their land holdings are land options, and not the land itself. Cheaper to walk away from.
Yep…and as the builders start letting the land options expire, the price of the land will drop as the seller watches his dreams of instant riches evaporate. This will be another un-bubble (what’s the opposite of bubble) of its own.
Construction costs and labor costs have gone up significantly in the past 2 years (30-40% in many places–due to materials costs going up and labor availability being tight), and many public homebuilders won’t keep inventory on the books, so they were buying in at ridiculously high land prices as well.
If they have some land that they bought a couple of years ago, they are golden on that product, but I suspect much of their land inventory is at much higher prices.
I believe that they are still making money on most home sales, but that may not last.
Well to counter your post with your own logic…there is now going to be a TON of available labor as construction slows and the slowdown will also cause material to become more readily available. This will cause prices to come down. Also, new building technology has constantly kept the price of contstucting homes in check. AND…as the speculation decreases and builders let land options expire, the land will also start decreasing in price as fewer builders want it…and as a land owner know, raw land just sitting is an expense. Land owners will be lining up to sell with decreasing prices in order to not miss the boat.
It’s what i was saying for last couple years.
Builder put some much gravy in the
price that even 40-60 % reduction
just return them ( builders ) to level
of profits 2003
Why the delay with Fannie?
They have got to fudge the numbers some more. The accountants are scrambling around trying to cover up more of their debt. Maybe they should get some of the cronies from enron or worldcom to help them get creative.
The intern had to run down to Kinko’s…
Here’s the link to the report:
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF
Whoa. Black Tuesday. If you aren’t interested in reading the gory details, “remedial actions” begin on Page 331. I look forward to reading the comments of experts here, but to me it looks like a Holy Crap for the establishment.
I see that Tom Lawler was one of the senior executives who was mentioned. Tommy, please come back and post your comments. How is that pension treating you buddy?
“‘If builders aren’t able to achieve order volume during the spring, there’s little chance to make it up in the back half of the year,’ said Rick Murray, an analyst at Raymond James & Associates.”
It’s May 23 which means we’re about 50 something days to July 15th after which you’ve blown it in terms of getting into a new house before school starts this year, if you’ve not bought.
Realistically, that means WINTER starts on July 16th. A second scary winter should bring most sellers back to reality.
“Orders for Toll houses, which sell for double the U.S. average, plunged 33 percent from February through April.”
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Down a third seems like a serious problem for TOL it seems to me. Maybe higher interest rates, higher heating and cooling costs, higher building materials costs, higher foreclosures, the change from investor demand to investor competitors as they sell what they already bought, higher insurance costs, greater scrutiny of toxic loans by regulators, and an economy that is going into the toilet will make this year a bit tough for TOL.
I still believe that they will declare bankruptcy before the end of next year. Not a bad short sale candidate, IMHO.
Check out insider sales for TOL. Looks like Ken Lay and Enron taught these guys how to do it, and Wall Street reports their spin as fact.
Yep they will be living it up on the yahct in the caribbean here soon laughing at all the common folk fools who bought overpriced housing from them. I can only imagine the food, drink and hotties partying with them.
Insiders can sell now that the 10-Q is released. Looks like a mini-short squeeze this AM followed by insiders dumping all day.
Keep in mind all these speculators are living in their houses and won’t be putting them back on the market to compete with TOLL.
That stock is a screaming buy!!! Up 4.28%… how can you argue with company stock buybacks financed by borrowed money?
You have to divorce the stock from the company. The company still builds and sells houses. Even dropping their number 200 this year they’ll still be building more than any other year except 2005. They make money, apparently lots of money. $5 a share and 155m shares is profit of more than $75,000 per house. Does everyone get this? They could cut prices (while trimming features) like $125,000 and still be a (barely) profitable company. Bankruptcy is barely imaginable.
If they are so profitable and have nothing but good opportunities, then why are they borrowing cash and buying back shares?
And even if they were barely profitable, their stock price would not reflect it precisely because everyone “doesn’t get this.” The market is irrational in both directions. You won’t utter the “Hom” out of “Home” or “Homebuilder” before someone changes the subject. These stocks will crash, and you are right, they will at some point probably be a screaming buy.
Absolutely, at some point a screaming buy. But look at today, who are the idiots buying this morning? Up 6% in the first hour. Monster volume all on lowered guidance.
Everyone trying to guess the bottom ??
i am from germany and i am shorting all the major homebuilders since last year. i´ve heard since then
almost every conference call from them and since
the first quarter they were deniing that there are speculaters out there.
the bounce after yet their third warning within 90 days
is just a little bit of covering and can´t save them from going lower. in zhe early phase of the decline the bounces of new lows were much mure painfull for a shorty like me. sometimes 5-10% in the dj homebuilderindex in just 2-3 days.
now every bounce is beeing used to sell stocks from the institutional.
Well, they better be selling “homes”, because a “house” costs much less than that. If they have to price it at a reasonable P/E or price to income or payment to income ratio, then they are going to lose that profitability.
A lot of features will need to be shed, due to the high costs of materials right now, meaning a lot less perceived value, and once you stop being a luxury item and become just another commodity, your pricing power goes away.
As has been mentioned on this board before, it’s not profits and losses that cause bankruptcy, but cash flow. They’ve blown a lot of cash on buybacks, and sales volume is declining.
Toll will probably file for bankruptcy protection sooner than we expect. They need the volume, and it is not going to be here for another 10+ years. The reserves to tough it out are gone. It’s an inherent problem in the perpetual growth business model. Public companies focused on “shareholder value” are not the same as a mom-and-pop operation, which can afford to exist its entire life as a static, profitable entity, paying its bills with cash from previous good times.
The problem is that like every jow speculator whatever they make goes right back into buying even more land and putting even more spec. houses. Yes they buy back shares but those are basically dumped by their management in the first place.
This is how bankrupcies result: because of Over-leaverage, not because of bad business model
Does anyone else find it puzzling that Toll Bros always rallies concurrently with terrible breaking news for the company? This strikes me as highly perverse, but maybe it is symptomatic of an investing landscape ruled by hedge funds and options traders, where up is down, and vice versa. I also notice that Toll and other builder stocks have a large and positive beta w.r.t. broad market indexes, which suggests that automatic portfolio strategies which purchase a broad basket of stocks on up days may be buffeting the big Wall Street HB stock prices, whatever the news may be.
This was a gift. I sold my TOL puts last week when TOL was not falling as hard as some of the other HBs. I bought puts this morning and was worried we would have another conference call rally like last time, but thankfully TOL tanked along with the rest of the market.
My guess is that the gap open resulted from the fact that the results were not even worse.
Orders down a third, and their stock price goes up? Whoever believes the US stock market is efficient lives in an ivory tower fantasy land.
KNOCK .. KNOCK… FNMA??? HELLO???
They need time to shred the evidence and hop on a plane to Costa Rica….
Come on, they are being thorough. It took them three and a half years they aren’t about to let a four hour delay worry them!
Does this mean interest rates may rise? Especially with no one wanting to hold on to MBS’s
http://money.cnn.com/2006/05/23/news/companies/fannie.reut/index.htm?cnn=yes
They are trying to figure out who is going to take the fall for this mess. It was the mail boys fault right.
We believe many customers currently feel a lack of urgency to purchase due to their uncertainty over the direction of home prices
Funny, I didn’t think it was that uncertain.
Exactly. If the P/E (price to rent) ratio is an indicator, prices have to fall 45% (back to about 2002 levels). The real lack of urgency is coming from sellers who don’t want to accept that.
ooh, I like how you put that. And it’s so true. I mean, I don’t really want to pay over 1998 prices, but people ’round here (Ann Arbor MI) are still often starting their asking prices at 30%-40% over 2002 level pricing, and that’s so ridiculous I don’t even want to look at the properties. Now, I don’t live in an utterly insane market, just a crazy one, where the prices are such that the median income is kinda enough to get you a starter home in a mostly-okay location with a non-suicide loan. Rents have been stagnant for a long time, and it would cost 30-100% more per month to buy than to rent depending on type of house and location. There should reasonably be at the very least “no urgency” among buyers in my kinda market, and at the very least total avoidance among buyers in the psychotic ones…
I did not realize they were or have halted tradeing of FNM. The articles read a bit like a softball, but for a stock to be halted, WOW!
Market is way up this morning, just a guess but after the report it might retrace a little…hehe….p
Author says market is going to crash with big consequences.
http://www.businessweek.com/investor/content/may2006/pi20060522_866341.htm
To Mr. Lingus,
Franklin Raines, the former CEO of Fannie Mae, was a close friend of Bill Clinton as well as tremendous supporter of the Democratic party. Both parties are rotten to the core but all that pachouli and incense has clouded your judgment.
TheGuru
To Mr. Lingus,
Please don’t poke his cage.
Funny!
BTW, I was going the mention, if your daughters ever mention that they like to hang out at Pirates Cove (SLO), don’t ask any questions.
Here is the link for the yahoo message boards if anyone would like to slam TOL for all those idiots out there : )
http://finance.messages.yahoo.com/bbs?.mm=FN&action=l&board=7080191&tid=tol&sid=7080191&mid=73036
AP
Report: Fannie Mae Manipulated Accounting
Tuesday May 23, 10:25 am ET
By Marcy Gordon, AP Business Writer
Federal Report: Fannie Mae Manipulated Accounting, Deceived Investors
http://biz.yahoo.com/ap/060523/fannie_mae.html?.v=4
Anyone else catch ‘Hot Topic’ this am. Rick Murray says HB’s are over priced and that there will be no soft landing. The gal says buy them now (she doesn’t own them but would if she could) because they have stabilized and any lower would put them below book value and that isn’t going to happen. Rick says that they are definitely going to go lower. The gal says it won’t happen because they don’t own the land and can therefore buy the land at a cheaper price when land prices go down…..
Yes, I just heard it. Funny how the host, Mark, was able to say that housing prices were still rising and that they couldn’t agree that land prices were falling, in spite of builders walking away from land contracts. (Less demand usually equals lower prices, right ?)
The media still doesn’t get it or at least isn’t ready to face the music. Maybe they themselves are highly leveraged homeowners and have a vested interest in not admitting that housing is on its last legs ?
How do they not own land? DHI has 9B in assets on its books, that’s alot of something.
How can they be below book value if they have no assets? Options lose value as prices go down too. If they have purchase options they’ll need to mark them to market just like if they owned the land outright. If they have no land and no options there’s hardly anything to be of value on their books.
I saw that too. Arguing against the evidence of a housing crash sound weaker and weaker and it sickens me to hear how some of the announcers couch their questions to favor housing bulls.
To me, Rick Murray’s facts crushed the arguments of the HBS cheerleader from UBS. By the way, I love pointing these news segments out to my wife who still isn’t a 100% crash believer yet.
I’ve said it before, and I’ll say it again - MY wife is the one who invented the “We Rent!” dance. Talk about a keeper.
OFHEO has the report on Fannie Mae out.
http://www.ofheo.gov
David
http://bubblemeter.blogspot.com
“…Toll lowered its fiscal-year sales forecast to a range of between 9,000 and 9,700 homes from a previous range of 9,200 to 9,900.”
“Toll’s orders dropped to 2,076 from 3,120 a year earlier, the second decline following 10 quarters of gains”
Hmm. 9000-9700 sales this year. I think even though this guy is the bearer of bad news he is still putting a little spin on this. They sold 2076 homes in the first quarter of the fiscal year times 4 equals 8304 homes total. I don’t expect sales to pick up for spring and they will be more than dead during summer, fall and winter. So where is this ralley going to come from? How does he suppose he is going to make up the extra 1000 homes? More smoke and mirrors while he sells off his stocks. Nothing to see here people move along…
Excellent observation. They will eventually lower this number to 7,500 to 8,000 homes by the 4th qtr!
Yep. When they first lowered guidance in November, it was back end loaded and one of the analysts asked Bob during the call about this, to which Bob admitted that sales needed to pick up in order for TOL to meet reduced guidance. Today’s downward revision was the third and you can bet there will be more.
I’ve recently formed the opinion that investors are very dumb and very lazy. Who would think to multiply the first quarter sales numbers by 4 to get the year number ? That is math and investors aren’t capable of doing much math. Furthermore, a number of economists and analysts stated this morning that they expect GDP growth to fall to 1.5% by 2007. A big, big slowdown is in the works.
Even Bernanke thinks people need to be more intelligent with their investments.
http://biz.yahoo.com/ap/060523/bernanke_financial_literacy.html?.v=8
Most money is invested FOR investers by people with virtually no personal stake in the outcome of the investment. Most people own stocks through mutual funds or 401ks or pension plans.
You are correct, though, most investors are lazy otherwise there would be hardly any mutual funds. I’ve also noticed the people are far more aware of the batting average of their favorite baseball players than the P/E of their stocks. That’s why the insiders make so much money and the rest of us are lucky to beat a passbook savings account yield.
“Even Bernanke thinks people need to be more intelligent with their investments.”
So, each man taking his own lumps for his own ignorance may not be so healthy for our country’s overall well being…now there’s a statement.
good catch. it’s not just making up 1,000 homes, but having to do it in the slow seasons.
it will take price reductions to meet those numbers.
Bernanke says comments to CNBC anchor a ‘lapse of judgement’
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The first of many mistakes…
Wall Street is working hard to set up Ben Bernanke as the fall guy, just in case the Greenspan put fails to morph into the Bernanke put (as they are hoping)…
The company reiterated its view that speculators are throwing in the towel and the housing market will rebound once it works its way through the excess inventory.”
Sick and tired of this it will bounce back really it will, I know it cna, I know it can and so on.
Here Mr. Toll read this: your answer to why we are here and where we are going:
http://www.financialsense.com/editorials/weiss/2006/0522.html
Sorry for the rant, but just got off the phone with a friend this morning who is buying an aprtment in drag (condo) here in OC, because it was decreased by a whole $4,000 and he thinks its a steal.
Worst aprt is he is echoing what Toll just said give me a break, there really is no help for these poor souls..
the housing market will rebound once it works its way through the excess inventory
It will, in about ten years.
remember these gems from mr. toll?
“New York and Washington and Phoenix and San Fran and L.A. and Las Vegas and Naples and Boca” - were about to slow down painfully. “Investors will get creamed, and they’ll get out of the deals,” he said, noting that a subsequent recovery would take anywhere from 3 to 10 months. But beyond that - a catastrophic crash? “Why can’t real estate just have a boom like every other industry?” Toll asked in complaint. “Why do we have to have a bubble and then a pop?”
…
The company expects to grow by 20 percent for the next two years and then will strive for 15 percent annually after that. Those estimates suggest that the company’s expected production of around 8,600 houses this year will expand to at least 15,000 houses by 2010. Individual Toll developments now range in size from a few dozen to 3,000 houses.
…
In the past couple of years, Toll and his deputies have begun analyzing European housing data to see if they hold any lessons for a maturing American housing market. Toll has been talking up the research to stock analysts and the financial press for the past year. His conclusions carry a whiff of new-paradigm thinking, but he nevertheless seems convinced that Europe’s present-day reality is America’s destiny. I asked Toll what our children - my kids are both under 8, I told him - would be paying when they’re ready to buy. “They’re going to live with us until they’re 40,” Toll said matter-of-factly. “And when they have their second kid, then we’ll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income.”
I grew alarmed. Was he kidding? He assured me he was not. “It’s all just logic,” Toll said. “In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half.” The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they’re going to get only half as much. “And that average, million-dollar insane home in the burbs? It’s going to be $4 million.”
FNM and TOL up today. WTF?
The PPT strikes again…