Real Estate

Toll Brothers, the bell that tolls for luxury market

Contracts plummet 36% in California as buyers worry about economy

Toll Brothers, the largest U.S. luxury homebuilder, reported purchase agreements fell 3% nationally in the third quarter from a year earlier, and in California, where some of its priciest developments are located, contracts plummeted 36%.

Worries about a recession, stock market gyrations and trade tensions are making wealthy Americans and foreign buyers think twice about purchasing a luxury home. Toll’s average home price was $882,648 in the quarter, the company said. That’s more than double the U.S. median home price of $280,800 in July, as measured by the National Association of Realtors

Another culprit was the Republican tax bill signed into law at the end of 2017 capping state and local tax deductions – known as SALT – at $10,000. That had an outsized impact on states such as New York, New Jersey, Massachusetts, Connecticut and California that have high-priced real estate coupled with hefty property taxes that support schools and local services. 

Toll’s results are due to “concerns with the luxury housing market, which has been affected by tax changes, decline of Asian buyers and late economic cycle concerns," JMP Securities analyst Peter Martin told Reuters.

Douglas Yearley, Toll’s CEO, said a strong labor market as well as low mortgage rates are providing “tailwinds” that will propel the homebuilder in the current quarter.

"While our third quarter contracts were down modestly, we are off to a good start in our fourth quarter," said CEO Douglas Yearley said in a statement. "Low mortgage rates, a limited supply of new and existing homes, and a strong employment picture are providing tailwinds."

Toll sold 1,994 homes in the third quarter, down from 2,246 a year earlier, the company said. Net income fell to $146.3 million, or $1 per share, in the quarter ended July 31 from $193.3 million, or $1.26 per share. Revenue fell 7.7% to $1.77 billion, while still beating the expectations of Wall Street analysts.

Backlog at the end of the quarter, a measure of future demand, stood at $5.84 billion and 6,839 units, compared with $6.48 billion and 7,100 units a year earlier, the company said.

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3d rendering of a row of luxury townhouses along a street

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