By Dawn Wotapka and James R. Hagerty
Lower prices, discounts on mortgage rates and other incentives
for home buyers yielded much stronger than expected orders for Toll
Brothers Inc. (TOL) in the fiscal third quarter ended July 31.
Toll's stock price surged 14.3% to $23.40 Wednesday as investors
saw the luxury home builder's preliminary results as a sign of
improving confidence among potential home buyers, many of whom
until recently have been scared away by expectations of further
price declines. Toll's net orders - contracts signed minus
cancellations - totaled 837, up 3% from a year earlier, the first
increase since 2005. In dollar terms, those orders were down 5% at
$447.7 million.
"Fence sitters are looking for reasons to jump in on the side of
buying," said Chief Executive Officer Robert Toll. He added that
"price is no longer the overwhelmingly dominant factor." A rebound
in the stock market and "a better feeling" about the economy and
job prospects have helped, he added. "The mood has changed."
Buyers aren't flocking to shop for homes. "Our traffic still
stinks," Toll said. But those who show up have become more serious
about buying rather than just asking for ever-deeper discounts, he
said. Among markets that have shown improvement recently, he said,
are the New York suburbs, Washington, D.C., Virginia, the west
coast of Florida from Naples to Tampa, and northern California.
Toll is cautious about encouraging customers to select quality
upgrades that sharply raise the price, Toll said, because of the
risk that appraisers, who have become more conservative, may nix
transactions at prices that appear high in relation to other recent
sales.
The Horsham, Pa.-based company recently has offered weekend
specials, such as discounted upgrades on countertops or cabinets
and mortgage rates of below 4%. The company's Web site touts
"amazing incentives" and "special limited-time offers." But Toll
said improving demand, especially since mid-July, has allowed it to
reduce incentives in "many markets," primarily in the Northeast and
mid-Atlantic states.
In the overall housing market, sales at the low end have been
much stronger recently than those at the upper end. That's partly
because mortgage rates are higher for "jumbo" loans, those too
large to be guaranteed by government-backed investors Fannie Mae
(FNM) and Freddie Mac (FRE). In the highest-cost parts of the
country, Fannie and Freddie can guarantee loans up to $729,750.
But Toll has kept its prices low enough so that 73% of buyers
were able to use loans backed by Fannie, Freddie, the Federal
Housing Administration or other government entities in the latest
quarter, a spokeswoman said. About 17% paid cash for their homes,
and only 10% needed jumbo loans.
The average price for net purchase contracts signed in the
latest quarter was $535,000, down 7.6% from a year earlier. Those
prices don't include the value of subsidized mortgages or some
advertised options, such as an added room, so the true price drop
probably is more than 7.6%.
Builders generally have been shrinking homes to lure today's
more cautious buyers. The average size of new detached
single-family homes sold in the U.S. declined to 2,545 square feet
in 2008 from 2,587 a year earlier, according to the U.S. Census
Bureau. The average had been gradually increasing for years.
But Toll said in a conference call that he doesn't see such a
trend for the upscale homes his company sells. "I don't see people
wanting smaller homes," he said. "I think the luxury market is here
to stay."
Toll said its orders in the third quarter normally are lower
than those in the second quarter, which coincides with the spring
buying rush, but this year orders in the third quarter were up 44%
from the prior quarter. A rise in the third quarter from the second
quarter has occurred only three other times since fiscal 1986, Toll
said.
Fewer buyers got cold feet. Toll's cancellation rate in the
quarter was 8.5%, down from 19% a year earlier and the lowest since
the fiscal second quarter of 2006.
"Buyers are more conservative and careful" than they were during
the housing boom, said Doug Yearley, a regional president for Toll.
But many "still want the big house with all the upgrades," he
said.
Toll's revenue fell to $461.3 million from $796.7 million a year
earlier. Earnings and other data for the quarter are due to be
released Aug. 27. Toll estimated that pretax write-downs related to
operating communities, land and land options and joint ventures in
the third quarter will be between $90 million and $160 million.
-By Dawn Wotapka, Dow Jones Newswires
-By James R. Hagerty, The Wall Street Journal