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Tuesday, November 11, 2008
Toll Says Homebuyer Traffic And Demand At Record Lows
John Spence
MarketWatch
BOSTON -- Toll Brothers Inc. on Tuesday estimated its fiscal fourth-quarter home-building revenue fell 41% from the year-ago period as October's economic meltdown wiped out any hopes of a quick recovery in the housing market.
The luxury builder (TOL) reported building revenue dove to $691 million from $1.17 billion, while net signed contracts fell 18% to 539 homes.
"Unfortunately, the preliminary signs of stability we had discussed in early September, during our 2008 third quarter earnings call, were upended by the past month's financial crisis," said Chief Executive Robert Toll in a prepared statement.
The crisis contributed to pushing up cancellations and drove homebuyer confidence and the company's traffic and demand to record lows, the CEO said, pointing to "accelerating fears of job losses, a large decline in consumer spending, a significant capital crunch, increased credit market disruption, and plummeting stock market values."
Toll Brothers estimated it will book impairment charges in the range of $120 million to $220 million for the quarter ended Oct. 31.
"Given the significant uncertainty surrounding sales paces, cancellation rates, market direction, unemployment trends and numerous other aspects of the overall economy, we are not comfortable offering delivery, revenue or earnings guidance for the coming year," said Chief Financial Officer Joel Rassman.
The company is scheduled to release full quarterly results on Dec. 4.
Despite the housing downturn, Toll shares have performed relatively well compared with the home-builder sector. Toll's stock, although volatile, is off just under 6% this year, while the iShares DJ U.S. Home Construction Index Fund (ITB) , an exchange-traded fund following builder shares, has shed 40%.
Toll shares may be benefiting from the firm's affluent customers, who are less likely to put off a home purchase due to a slumping economy. Also, the company is seen as having one of the stronger balance sheets in the business.
Builder stocks fell sharply on Monday after Beazer Homes USA Inc. (BZH) released its own preliminary fourth-quarter results. The company said its new home orders rose from the year-earlier quarter but warned its ability to use previous losses to lower its taxes in the future could be in doubt. See full story.
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If you¿re like the vast majority of the population, buying a home is the largest personal investment you will ever make. You're buying something that¿s many times your yearly salary with the intention of holding onto that home for many years.
The bank you're going to get the money from to buy that home knows that, too. And if you're going to get a mortgage on a home, the bank wants to know how you're going to pay for said house.
Usually, you give a lot of paperwork to the bank, so the bank can tell if you're able to afford the house or not. You give them bank statements, credit card statements, letters from your employer stating your salary, tax returns, etc.
But, what happens if you may not be the perfect candidate for the home of your dreams? Or, you're buying too much home (the bank thinks you can afford a $200,000 home, you want a $230,000 home). Or, you don't have the money for a down payment. Or, you haven't paid your bills on time in the past. Or, the documents of how you make your salary are not 100% available.
Enter the subprime mortgage. Subprime mortgages are loans given by banks to people who may fall under any one of those above conditions, or others. Why would anyone want a subprime mortgage? Well, homebuyers get subprime mortgages because they get to buy the home they want. Banks give subprime mortgages because they can charge people more money for that mortgage. Remember, the difference in interest rates on a $200,000 or $300,000 home can mean the difference between hundreds of dollars in interest payments.
Still there¿s risk for both the person getting the mortgage and the bank granting it. When the playbook works, the value of the house rises. So, even if Joe Q. Badcredit couldn't afford the house he bought in 2001, at last resort Joe or the bank could sell the home, make a bundle off its increased value, and the bank could get its money back.
The playbook goes out the window, though, when home prices don't increase. Then homeowners run the risk of defaulting and banks lose money. At its worst, homeowners can lose their houses.
If you¿re in the market for a home, and the banker says you qualify for a subprime mortgage, it probably means you need to provide more documentation of how you¿re going to pay for that house. Or, you may be buying too much home. Talk with your banker about why you qualify for a subprime mortgage, and try to fix it.
