Mr. Toll's Optimism turns Pessimistic: But is he Right?

Implications: Last week, Toll Brothers reported a drop in quarterly profit from the same period last year. Perhaps more startling than the drop were comments from highly respected CEO Robert Toll. Wall Street’s housing analysts eagerly anticipate Mr. Toll’s regular comments, which are usually on target. Surprisingly, his comments turned from clearly optimistic (earlier in the month) to somewhat pessimistic last week.  Which way is the market headed?

Analysis:

Last week, Toll Brothers reported a 67% drop in quarterly profit from the same period last year. Perhaps more startling than the drop were comments from highly respected CEO Robert Toll. Wall Street’s housing analysts eagerly anticipate Mr. Toll’s regular comments, which are usually on target. Surprisingly, his comments turned from clearly optimistic (earlier in the month) to somewhat pessimistic last week. In early February, Mr. Toll said, “We’re at the beginning of the comeback trail- we’re doing better….” Last week, as highlighted in the Wall Street Journal article, Mr. Toll said, “’There are too many soft markets at this stage of the selling season to call a general upturn in the new home market’”. Which is it? Did the market change course drastically between January and February.

During the last 9 weeks, we here at Belfiore Real Estate Consulting personnel have surveyed more than 650 Phoenix metro area sales office personnel and talked with dozens of local builder executives, developers, appraisers and brokers. We have found stabilizing speculative supply conditions. This week’s compilation of West Valley data should give us more of an idea as to whether a trend is underway, but it appears as though “inventory” home levels have indeed stabilized. If so, as we have reported for a number of months now, prices will soon stabilize, barring one of a few risks outlined in previous reports coming to fruition.

New home pricing has continued to change the market during the last 3 months. Some builders have drastically cut base prices in just the last 3 to 4 weeks- many below what I consider “market rate” prices. Rather than risk remaining overpriced, builders’ cuts appear to be a final, “last ditch”, effort to meet the needs of buyers waiting for the market to hit bottom.

Our surveys show recent price cuts have worked, much better than cuts in mid- and late 2006. Sales volumes are up- doubling, tripling, even quadrupling sales figures these builders (those that have cut prices recently) experienced in late 2006. The new home market has become one of the “has” and the “has nots”. Those that have recently adjusted prices are experiencing sales of 8 to 20 units per month, while those that haven’t are at or near 0 sales. Those buyers sitting on the fence have responded.

So, should you be optimistic about the direction of the Phoenix housing market? I think you should. You should be “cautiously optimistic”. During the next 3 to 6 months, builders will continue to report losses and earnings below those experienced last year at this time. This should be expected. New home prices were 15% to 20% higher at this time last year. But, the trends appear to be turning. Inventory that has plagued the market during the last 12 months appears to be stabilizing. Builders priced right are selling homes. From my perspective, it appears the New Year may be bringing some new trends.