Homebuilder Toll Brothers Trims Losses, Predicts Recovery (Again)

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Overly optimistic home builders helped fuel the housing bubble. Now the country's largest luxury homebuilder is back -- as overly optimistic as ever. Should buyers believe the hype?

In case you missed it: Toll Brothers reported that its losses shrank in the second quarter to $40.4 million or 24 cents a share, compared with $83.2 million, or 52 cent a share the previous year. In a sign of better times to come, net signed contracts rose 41 percent to 820 units. The contract cancellation rate also slowed, to 5.3 percent from 21.7 the year before. The news was good enough to push Toll Bros' shares up 3 percent.

But wait. Was this an anomalous blip due to the homebuyer tax credit, which expired April 30? (Nice coincidence: The company's fiscal third quarter ended April 30.) I thought everyone is worried that the credit simply jammed all the demand into the first four months of the year.

Not so, says Toll Brothers' CEO Robert Toll.

"It appears our business has finally emerged from the tunnel and into a bit of daylight," he says in the earnings release.
"May's activity suggests that for us the tax credit wasn't the determinative factor. Rather, we believe the past few months' activity has been driven by an increase in confidence among our buyers in their job security, their ability to sell their existing homes and general trends in home prices."

Toll is referring to activity in the first three weeks of May, which saw traffic from interested buyers rise 23 percent and non-binding reservations gain 11 percent.

That doesn't sound like a very solid argument.

This is the same company that has been calling the bottom ever since it first started losing customers in 2006. At the end of 2006, six months into the housing slump, Toll told investors: "The fundamentals that typically lead our industry out of a slowdown are already in place."

In the third quarter of 2008, days before Lehman Brothers went bust, he pointed to stabilizing deposits and low cancellations, adding: "...we believe that there is pent-up demand. When we have held promotions, many more buyers than usual have come out and put down deposits."

In the third quarter of last year he said: "We believe declining cancellations and more solid demand indicate that the housing market is stabilizing."

And yet, Toll's revenues as well as the values and and number of homes it has sold have dropped year after year. It's not that there's anything wrong with the company's strategy; Teresa Rivas at MarketWatch points out that Toll bolstered its balance sheet during the recession, with $1.8 billion in cash and just $2 bilion in debt.

The truth is, it's too early to tell how homebuyer confidence is really shaping up.

Maybe Robert Toll should just admit he'll have a better idea when Toll Brothers releases its third quarter results at the end of August.

Until then, best to stick to other indicators when trying to assess the current state of the housing market.
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