Horsham, PA, June 9, 2006-- The slowdown in the housing market is being driven by growing inventories of homes from overbuilding and by speculators leaving the market, Toll Brothers chief executive Robert Toll said Thursday.
Still, Toll expects things to turn around soon.
"The housing market is experiencing an oversupply, to put it mildly," Toll said during the luxury-home builder's annual analyst conference.
The supply is coming from speculators who bought in 2004 and 2005 who are now sellers, and to make matters worse aren't buyers anymore," he added, noting that many homes built by more aggressive builders also are sitting unsold now.
As a result, there is uncertainty about the market's direction, and potential buyers are remaining on the sidelines to see how things shake out.
However, Toll said that once the market "fights its way through excess inventory, the next great story will be pent-up demand," as buyers return to a stabilizing market.
The executive also pointed to favorable demographics, the increasing number of affluent households, a short supply of lots approved for building and increasingly difficult regulatory processes as more positive signs.
Still, Toll thought that the market would burn through the excess inventory faster. "I don't see this lasting too much longer--the economy is too good," he said, citing solid employment data.
Toll Brothers, the largest U.S. builder of luxury homes, acknowledged that its markets have been slowing in recent months, but said that it has navigated downturns in the past.
"Since the early 1990s, there hasn't been one straight boom for housing, but instead high market volatility," commented Fred Cooper, Toll's senior vice president of finance. Housing starts have dropped several years during that period, and the Federal Reserve has been raising interest rates partly in response to housing-bubble jitters.
"We recognize we're in a bumpy time right now in the market," Cooper added.
However, he said the company can still grow profits by expanding its community count, and controlling land is key to that goal. The company has only done six small acquisitions in its history and prefers to grow organically, according to Cooper.
"Builders that control land will be in the best position over the long term," he said.
Cooper pointed out that the company's approach is to first put land under option with a relatively small deposit and take it through an oftentimes lengthy and complex approval process for building. Then Toll buys it and takes title. About 51% of the 91,000 lots controlled by Toll are optioned and the rest are owned, he said.
Typically, the company won't start building a house until it has a contract with a buyer, from which it gets a nonrefundable down payment, which helps discourage cancellations, Cooper indicated.
At the end of its fiscal second quarter, Toll said that its backlog of homes awaiting construction, including unconsolidated entities, had a sales value of more than $6 billion. Analysts surveyed by Thomson First Call are looking for the home builder to deliver revenue of $6.59 billion in 2006, up from $5.79 billion the prior fiscal year.
Through Wednesday's close, Toll shares are off more than 23% year to date as home builders have traded lower on fears of a cooling housing market and rising mortgage rates, which make homes less affordable for potential buyers.
During the annual event, Toll management said that the company plans to continue to grow the number of its selling communities and buy back more shares.
"We've been using excess cash flow to repurchase stock, and will continue to opportunistically buy back more," said Joel Rassman, chief financial officer.
So far this quarter, Toll Brothers has repurchased about 1.65 million shares.
