Horsham, PA, May 8, 2006--Luxury homebuilder Toll Brothers Inc., on Friday said signed contracts for its homes fell 29 percent in its second quarter and that home deliveries for the year will be 200 lower than expected as the slowing housing market takes hold.
But shares of the Horsham-based company and other homebuilders rose because a weaker-than-projected jobs report for April was seen on Wall Street as giving the Federal Reserve less incentive to raise interest rates. That would slow the rise of mortgage rates.
"People at the Fed can't have a reason to raise rates. If rates stop going up, it's a good thing for housing," said Alex Barron, an analyst at JMP Securities in San Francisco.
After five years of explosive growth, the housing market is in the grip of a slowdown prompted by rising mortgage rates and higher inventories.
"It's pretty much what we had thought. Things are slowing and at a pretty rapid rate," said William Mack, a home building analyst for Standard & Poor's in New York.
On Thursday, Freddie Mac said the average 30-year fixed-mortgage rate rose to 6.59 percent, the highest point in nearly four years. It was the sixth week in a row that mortgage rates ticked up.
While new home sales rose 13.8 percent nationally in March, the median price of homes sold dipped 2.2 percent as builders cut prices to move inventory. Sales of existing homes edged up in March, but the backlog of unsold homes hit a record high, according to the National Association of Realtors.
Even Toll Brothers, whose well-heeled customers are less vulnerable to economic winds, isn't immune.
For the second quarter, Toll said signed contracts came in at $1.56 billion, down from last year's $2.2 billion. Its backlog rose 3 percent to $6.07 billion from $5.87 billion in 2005. The biggest declines in signed contracts were on the East Coast.
The cancellation rate over the quarter was 8.5 percent, higher than Toll's historic average of about 7 percent.
Toll predicted it would deliver between 9,000 and 9,700 homes in fiscal 2006, a decline of 200 homes from its previous outlook.
The homebuilder said speculative buyers are putting their recently bought homes back on the market or canceling contracts in mid-construction. Nonspeculative demand has weakened because buyers are worried about the direction of home prices, the company said.
"We've certainly been impacted by the overall increase in supply," chief executive Robert Toll said during a conference call with analysts.
He said the company is not "sitting on many unsold homes. So we are not driven to heavily discount, although we are discounting in some places."
Toll said second-quarter revenue will be up 18 percent to $1.44 billion in the quarter, but lower than the $1.47 billion projected by analysts in a Thomson Financial survey.
Other homebuilders are feeling the pinch as well.
On Tuesday, Hovnanian Enterprises Inc., the nation's eighth-largest homebuilder, lowered its outlook for the second quarter and full year. Hovnanian cited cancelations, slowing sales, higher material costs and stepped up concessions and incentives.
Centex Corp. recently said its new orders fell 11 percent in the fourth quarter. The company also scaled down its earnings forecast for 2007. Pulte Homes Inc., and Beazer Homes USA Inc., also said new orders fell during the quarter.
But Toll believes the housing market will improve as the oversupply shakes itself out.
"We don't think ... this is the beginning of hard times," Toll said.
Toll Brothers will report its second-quarter earnings on May 23.
