Toll Brothers Orders Plunge as California Buyers Vanish

(Bloomberg) -- Toll Brothers Inc.’s new home orders dropped 24 percent in the fiscal first quarter, the steepest annual decline for the biggest U.S. luxury homebuilder since the depths of the housing crash in 2010. The company struggled to find move-up buyers in California, which is gripped by an affordability crisis.

Analysts expected a decline of less than 15 percent in new home contracts in the quarter, which ended Jan. 31. Instead, it was the largest drop since the 27 percent year-over-year fall in the third quarter of 2010.

An improvement in margins provided comfort for some investors, but they were based on contracts signed six or nine months ago, before the market began cooling, said Bloomberg Intelligence analyst Drew Reading. Orders fell 62 percent in California, where Toll has a heavy focus.

Toll shares fell as much as 3.3 percent and traded at $36.74 at 1:10 p.m. in New York, down 1.4 percent.

“It was worse than anybody was looking for,” Reading said in a phone interview. "It has become very clear that the higher end of the market has been weaker than the lower end. Also in December there was stock market volatility and a lot of Toll’s buyers are purchasing their home with their investments, rather than monthly paychecks.”

Toll Brothers is especially vulnerable to the housing slowdown, which has hit the higher end of the market where inventory is greatest. While mortgage rates have come back down, they jumped last year, exposing an affordability problem that built up over years as prices outpaced incomes. It is especially bad in California, where sales are falling, making it more difficult for Toll buyers to sell existing homes to buy new ones.

Alex Barron, analyst with the Housing Research Center in El Paso, Texas, said that California orders likely took a hit, in part, because Chinese buyers are getting scarce as China tightens controls on capital outflows.

"This is not just an issue for Toll but for anybody selling homes to the Chinese," Barron said.

The company said that non-binding reservation deposits, which it stopped reporting in previous years, saying it was an unreliable indicator of demand, were down from a year earlier. But it said the last week’s deposits were better.

“We attribute the decline in our first quarter contracts to a difficult year-over-year comparison, a lack of current inventory in certain locations and the industry-wide slowdown that began in the second half of 2018,” Douglas Yearley, the company’s chief executive officer, said in a statement.

To contact the reporter on this story: Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editors responsible for this story: Debarati Roy at droy5@bloomberg.net, Rob Urban

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