“It Appears We May Be Entering a Period of More Moderate…”

“Yes, it’s been trending up, which is really astounding. Every day I get the New York Times and The Wall Street Journal, and I don’t think they’ve missed a bad article in our regard in the last two to three weeks. And it’s amazing to me that we’re doing the business that we’re doing, which is tremendous, in the face of this bad press. I mean, if there’s anybody left in the U.S. that hasn’t read an article that this is the absolute peak, I’d like to meet them. So who are all these people that are buying at the absolute peak, according to the newspaper? They’re people who want the move up home, whether it be attached, multifamily, or single, and aren’t willing to play the market according to the press. It’s really astounding to me that we’ve been doing the business that we’ve been doing.” —Toll Brothers CEO Robert Toll, August 8, 2005 Well the news this morning is about homebuilders—specifically Toll Brothers, and more specifically CEO Robert Toll’s cautionary commentary in this morning’s earnings release, which is quite a change from the “trees-grow-to-the-sky” view which management has consistently (and correctly) given during every short-term wiggle in the housing market for the last several years (see August 8th quote above).

The contents of today’s press release from Toll Brothers need no elaboration from me: “In addition to delays in community openings, about twenty-five percent of our communities still have backlogs extending twelve months or more, and, therefore, are not open for sale on a regular basis. Even though we produced record contracts against FY 2004’s challenging fourth quarter comparison (FY 2004’s fourth quarter contracts were up 51% above FY 2003’s fourth quarter), we believe a shortage of selling communities, coupled with some softening of demand in a number of markets, negatively impacted our contract results. “Since Hurricane Katrina in early September, we have observed buyers taking longer to make their purchasing decision. We attribute this change to the significant decline in consumer confidence in the last two months that was precipitated by the hurricanes and their aftermath, and to record gas prices. “It appears we may be entering a period of more moderate home price increases, more typical of the past decade than the past two years. Comparing the current market to the past five years, excluding 2004, which was extraordinary, FY 2005’s fourth quarter ‘per-community’ non-binding reservation deposits exceeded the five-year average from FY 1999 to FY 2003 in seven of the last nine weeks (encompassing September and October) of FY 2005. “We remain optimistic. The demographics for our industry remain outstanding due to continuing, regulation-induced, constraints on lot supplies and a growing number of affluent households. With approximately 81,000 lots under our control, compared to 60,189 at FYE 2004, and a projection of approximately 265 selling communities by FYE 2006, we believe we will enjoy continued growth as we expand geographically, diversify our product lines and continue to gain market share.” Expect plenty of fireworks on the conference call at 2pm, Eastern Standard Time.

Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.