Chicago, IL, November 8, 2006--Three leading home builders warned that the slowdown in the country's once-soaring real estate market continued in the latest quarter as deteriorating consumer confidence and falling prices cast a growing pall over the sector.
Luxury homebuilder Toll Brothers Inc. said it expects to report a ten percent drop in quarterly home-building revenue, and warned of continuing softness in formerly booming markets such as Northern California and parts of Florida.
The company also said it expects to take fourth-quarter write-downs of $50 million to $100 million on both the land it owns and has options to buy, up from a prior forecast of $4 million. The charges will reduce net earnings by 18 cents to 36 cents per share.
Meanwhile, Toll Brothers' smaller rival Beazer Homes USA Inc., which builds houses largely for first-time buyers, posted a 44-percent decline in quarterly earnings and forecast profit sharply below expectations for its 2007 fiscal year. Luxury homebuilder Hovnanian Enterprises Inc. said late on Tuesday it expects a preliminary fourth-quarter net loss, due in part to charges related to cancellations.
Though the reports showed weakness at both extremes of the market, none was unexpected, coming on top of a series of government and industry reports that showed America's long housing boom has corrected. New home sales and prices are both sharply below year-ago levels, as rising interest rates and steep energy prices dampen consumer spending.
As a result, neither Toll's nor Beazer's shares suffered much in Tuesday trading. Toll Brothers' stock fell as much as 2 percent in early trading but later recovered and closed near to unchanged, a sign investors had already factored in weakness.
Beazer's shares, meanwhile, actually edged higher as results were not as weak as Wall Street had expected. But Hovnanian stock fell 1.9 percent.
While Toll's write-offs were larger than the market expected, John Tomlinson, an analyst at Majestic Research, said the move made sense. "They (Toll Brothers) just don't want to exercise all these options on land contracts if demand is so weak at the high end of the market," he said.
Tomlinson said 92 percent of the local U.S. markets that Majestic reviewed showed negative year-over-year order trends in September.
Toll Brothers' chief executive said the economic trends are leading customers--even those in the high income bracket that his company serves--to take a wait-and-see approach.
"Nobody wants to buy something that they think will cost less two weeks or two months later," said Toll Brothers chief executive Robert Toll on a conference call.
Preliminary numbers show the company posted home-building revenue of $1.81 billion for the fourth quarter ended October 31. Analysts, on average, were expecting $1.87 billion, according to Reuters Estimates.
Toll Brothers said quarterly total contracts suffered from a higher-than-normal 585 cancellations, one-fourth of which came in the Orlando and Northern California markets.
The company lowered its land position by around 6,500 lots, ending the quarter with around 74,000 lots owned or controlled, a decline of 19 percent.
"Given falling home prices, we believe it is necessary and prudent for the builders to keep trimming more recent lot positions," UBS analyst Margaret Whelan said in a note to investors.
Toll Brothers said it expected to deliver between 6,300 and 7,300 homes for fiscal 2007, compared with its previous forecast of 7,000 to 8,000. The company expects to deliver between 1,500 and 1,800 homes in the current first quarter.
The Horsham, Pennsylvania company is scheduled to release its fourth-quarter financial results on December 5 and did not update its previous forecast of earnings of $1.33 to $1.53 per share.
