Toll Brothers Home Orders Sink 60% as Rates Hit Luxury Buyers

(Bloomberg) — Toll Brothers Inc., the largest US luxury-home builder, 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 through July, signed purchase contracts tumbled 60% from a year earlier to 1,266, according to a statement Tuesday. Analysts were expecting 2,568, the average in a survey compiled by Bloomberg. The company said it expects to deliver 10,000 to 10,300 homes in its full fiscal year, down from a previous estimate of 11,000 to 11,500 homes.

After a pandemic sales rush, US builders are facing plummeting demand, with purchases of new homes in July falling to the slowest pace since 2016, according to the latest government data. The slump is pushing many companies to offer discounts and other buyer incentives to avoid a pileup of inventory.

Read more: US New-Home Sales Plummet to Slowest Pace Since Early 2016

Toll’s customers are mostly move-up buyers who can afford houses selling at an average price of about $1 million. Still, mortgage rates that have almost doubled since the start of the year have cut into their purchasing power, while slowing sales of existing homes have made it harder for potential buyers to trade up.

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

“The move-up market will continue to face unique challenges as current homeowners are less inclined to trade up due to massive home-price gains and the likelihood they carry a significantly lower rate on their current mortgage,” Reading said in an email. “The higher end of the market also tends to be more discretionary, which means ongoing volatility in the stock market could remain an overhang.”

The company said it was also hampered in its fiscal third quarter by “unforeseen delays” with municipal inspectors, continued 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 caused many prospective buyers to step to the sidelines,” Chief Executive Officer Douglas Yearley said in the statement. “However, in more recent weeks, we have seen signs of increased demand as sentiment is improving and buyers are returning to the market.”

The company reported an adjusted home sales gross margin of 27.9%, compared with 25.6% a year earlier. That helped boost 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% at 5:26 p.m. in New York trading after markets closed. They had fallen 37% this year through Tuesday’s close, compared with a 31% drop for an S&P index of homebuilders.