Luxury home builder Toll Brothers Inc said on Wednesday that it expects to report a decline in quarterly home-building revenue as the US housing crisis deepens. The company said the net number of signed contracts for the third quarter ended July 31 was down 31 percent from a year earlier to $727.1 million, and cancellation rates rose.
The decline in contracts was worse than expected, said real estate analyst Mike Larson of Weiss Research in Jupiter, Florida. "What happened in subprime, the tightening of lending standards, is starting to a lesser extent to spread to jumbos, so that could be an obstacle for Toll," Larson said.
Jumbo mortgages are loans for purchases of large or luxury homes, which are the core of Toll's business. Based on preliminary results, Toll Brothers said its home-building revenue fell 21 percent to about $1.21 billion in the third quarter. That was within the company's May forecast, which had called for $990 million to $1.28 billion.
"We are now in the 23rd month of a down housing market," Chief Executive Robert Toll said in a statement. "With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down."
On the other hand, pent-up demand may be building among potential home buyers, since the US economy and employment are still strong, and demographic trends are lending support, the Horsham, Pennsylvania-based company said. A recovery in the home-building sector is not likely before the second half of 2008, Larson of Weiss Research said.
"We have too many homes for sale, too many mortgage lenders going under or curtailing their loan programs, and despite a slight decline in prices they're still high compared to income," he said. Toll said that under current market conditions, it is not comfortable giving an earnings outlook.
The company plans to report its third-quarter results on August 22. Because of its fiscal calendar, Toll is the first major home builder to report a quarter that will contain July. Investors use it as an indicator of the performance of other home builders.
For more than a year, home construction has fallen sharply on weakening demand and rising interest rates. Problems in subprime mortgage lending - loans to those with sketchy credit histories - have made it even more difficult for potential buyers to get a mortgage, and banks have restricted mortgages even to those with good credit.
Pending completion of an impairment analysis, Toll estimates its pretax write-down for operating communities, land and land options for the quarter at $125 million to $175 million. The third-quarter backlog of homes on order fell 34 percent from a year earlier to about $3.67 billion.
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