Toll Brothers’ Q3 was awful, of course, but CEO Bob Toll continues to say he sees signs of “stabilisation” in demand. The near-term problem is inventory–houses for sale as far as the eye can see–and this part is getting worse, as a wave of foreclosures hit the market. Massive low-price competition from foreclosures will continue to hit Toll’s revenue and margins going forward.
Toll boldly predicts an upturn at some point, when inventories finally decline, but he has no idea when that will occur.
Still, add Bob Toll’s comments to the list of data points that we’re seeing early signs of a turn in the housing market. Not a bottoming–just a moderation in the rate of decline.
“It appears that per-community traffic and deposits at our sites over the past several months have been stabilizing, albeit at historic lows. We also note that our number of cancellations this quarter, although still greatly elevated from our historic norms, is the lowest in nine quarters. We observe that these indicators have occurred in the face of a particularly difficult year that has included explosive energy price increases, rising unemployment and severe mortgage and credit conditions. Even so, we believe that there is pent-up demand. When we have held promotions, many more buyers than usual have come out and put down deposits.
“We are now completing the third year of the worst housing market since we started in 1967. Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers’ market. Tightened mortgage lending standards have sidelined others. Single-family housing starts have decreased by approximately 65% from their peak in January 2006: Starts now stand at their lowest level since January 1991. We believe that most big public builders have sold off most of their spec inventory, which eventually should help stabilise home prices. However, we currently have to contend with foreclosures as the new low-priced competition.
“Once the supply of foreclosed inventory is exhausted, we believe that favourable demographics will kick in and the housing market in general will begin to recover; unfortunately, we can’t predict when that will occur. These beneficial demographics include a projected continuing increase in household formations and in the number of affluent households, baby-boomer demographics that should provide a basis for greater demand for second homes, a maturing generation of echo boomers who will be positioned to seek the American Dream of home ownership, and a continuing growth in immigration, which should contribute to the demand for housing.
“With our land teams intact and significant capital available, we believe we are prepared, as in prior downturns, to take advantage of opportunities that will arise from the industry’s distress. These resources, combined with our experienced management team, our diverse product lines, our brand name and the tremendous dedication of our associates, position us well as we plan for the future.”
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