New House Orders from Toll Bros. fell rapidly as mortgage costs rose
Toll Bros., the Fort Washington-based million-dollar homebuilder, said it suffered a 60% drop in new orders in the three months ended July 31 – the latest sign that many Americans have lost confidence in their economic prospects as food, fuel and borrowing costs rose earlier this year.
Contracts signed for future sales fell to 1,266 homes, worth $1.7 billion, from 3,154 units, worth $3 billion a year earlier. Still, revenues from homes Toll had already built and sold rose slightly from a year ago, and corporate profits jumped as they continued to raise prices faster than rising home costs. labor or land.
» READ MORE: What record inflation means for your household
Is the worst over? Chief Executive Douglas C. Yearley Jr. told investors Wednesday morning that more potential buyers visited Toll homes and websites and signed contracts in early August. The stock rose after it said it expects long-term sales of large homes, apartments and rental homes to likely strengthen, citing demographic trends. Shares closed Wednesday at $46.22, up 1.3%, partially regaining the 2.6% lost after the company released low order numbers on Tuesday night.
But “there is little consolation or mitigation” for the “dramatic” fall in new orders, real estate equity analyst Buck Horne told clients of Raymond James Financial Inc. in a report.
He added that the lower level of sales than Toll Bros. performance in 2011, when the economy was still recovering from the Great Recession.
At around $47 per share, Toll’s price now only reflects the approximate “book value” of the properties he controls, not future earnings.
That’s a big change from last December, when toll stocks briefly topped $75, before inflation spiked and the Federal Reserve accelerated interest rate hikes in the US. hope to slow the economy and moderate prices.
In remarks to investors, CEO Yearley blamed “sharp increases in mortgage rates [and] much higher house prices. The toll itself had been increasing its prices by around 5% every three months until recently.
Yearley also criticized the falling stock market and rising consumer prices, which he said have discouraged some homebuyers, but not wealthier ones buying larger homes. Toll says 20% of his buyers pay cash.
And the CEO cited “non-stop headlines” of a slowing economy.
According to Freddie Mac, the finance company for mortgage lenders, the average US 30-year fixed-rate mortgage rate charged by banks and other lenders has doubled, hitting a recent high of 5.8% in June, from 2.9% last September.
Rates fell in five of the following eight weeks and averaged around 5.1% last week. But homebuilders are bracing for higher rates in the months ahead as the Federal Reserve again raises its targets. Short-term fixed rate loans, favored by many Toll Bros. buyers, are slightly cheaper and carry lower fees.
A 3% to 5% increase on a $500,000 30-year loan raises monthly payments from around $2,600 to around $3,200 per month, discouraging buyers for whom even the lower figure is exaggerated.
“As soon as mortgage rates took off in response to rising long-term interest rates, housing demand cooled and the euphoria that plagued the housing market ended,” said James M. Meyer, chief investment officer at Tower Bridge Advisors in Conshohocken. in its daily note to investors on Tuesday.
But Toll argues that monthly payments are less important to his buyers, who can buy homes with savings or proceeds from other real estate sales.
The company says it still has an order book of more than $11 billion worth of homes, for which buyers have already deposited about $80,000 each, non-refundable. This should guarantee plenty of business in the coming quarters, according to Toll Bros.
And the company reported an increase in customer deposits for new homes in the first weeks of August, suggesting that demand may have stabilized “after the free fall of June and July”, the report concluded. Horne analyst.
Toll remains highly profitable, retaining about 28 cents of every dollar sold as gross profit, after expenses and before taxes. That’s up from about 26 cents a year earlier.