Toll Brothers home orders fall 60% as prices hit luxury buyers

(Bloomberg) — Toll Brothers Inc., the largest U.S. luxury homebuilder, reported a plunge in quarterly orders and cut its sales outlook as rising interest rates challenge buyers, even at the high end of the market.

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For the three months to July, signed purchase contracts fell 60 percent from a year earlier to 1,266, according to a statement on Tuesday. Analysts had expected 2,568, the average in a survey compiled by Bloomberg. The company said it expects to deliver 10,000 to 10,300 homes in the full fiscal year, compared with an earlier estimate of 11,000 to 11,500 homes.

After a pandemic-induced sales rush, U.S. builders are facing a sharp drop in demand, with purchases of new homes in July falling to their slowest pace since 2016, according to the latest government data. The recession is prompting many companies to offer discounts and other buyer incentives to avoid stockpiling.

Read more: US new home sales fall to slowest pace since early 2016

Toll’s customers are mostly move-up buyers who can afford homes that sell for an average price of about $1 million. But mortgage rates that have nearly doubled since the start of the year have sapped their purchasing power, while a slowdown in existing home sales has made it harder for potential buyers to transact.

For Toll, the full impact of the slowdown is likely to extend into 2023 because the company’s homes are taking longer to build, Bloomberg Industries analyst Drew Reading said after the results were released.

“The bull market will continue to face unique challenges as current homeowners are less willing to trade up due to the huge gains in house prices and the possibility of a significantly lower interest rate on their current mortgage,” Reading said in a e-mail. “The higher end of the market also tends to be more discretionary, meaning continued volatility in the stock market could remain an overhang.”

The company said it was also hampered in the third quarter of its fiscal year by “unforeseen delays” with municipal inspectors, ongoing labor shortages and supply chain disruptions.

As the quarter progressed, “we saw a significant decline in demand as the combined impact of sharply rising mortgage rates, higher home prices, stock market volatility and macroeconomic uncertainty drove many prospective buyers to the sidelines,” said CEO Douglas Yearley. in the statement. “However, in recent weeks, we have seen signs of increased demand as the climate improves and buyers return to the market.”

The company reported an adjusted gross home sales margin of 27.9%, compared with 25.6% a year earlier. That helped lift earnings per share to $2.35 from $1.87 a year earlier, beating the Bloomberg consensus estimate of $2.31.

Toll shares were down about 2% as of 5:26 p.m. in New York trading after the close of business. They had fallen 37% this year through Tuesday’s close, compared with a 31% decline for the S&P index of homebuilders.

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