Toll CEO: Early in housing's recovery, a flat year 'is not such a bad thing'

The home-building industry isn't experiencing quite the good year it had in 2013, but Toll Bros. CEO Douglas C. Yearley Jr. said Thursday that "relatively flat is not such a bad thing."

"I'll take it," Yearley told the Wells Fargo Securities Industrial and Construction Conference in New York, suggesting that flat sales were an improvement over what the industry had to contend with during the housing downturn.

"We are still early in the recovery stages, and we have always anticipated that there would be bumps," he said, adding that "80 percent to 90 percent" of the markets where the Horsham-based luxury builder works are "B or better, but last year, they were B or better."

Yearley declined to disclose Toll's fiscal second-quarter results, which will be reported later in the spring.

Credit availability and factors such as the increased costs of Federal Housing Administration loans that are affecting the housing market in general don't directly have an impact on Toll's buyers, he said, noting that 20 percent of Toll Bros. home purchases are all-cash transactions, and that those who take out mortgages put 30 percent down and have an average credit score of 756.

But credit issues do affect the "food chain" of which the builder's customers are a part, Yearley said. If the starter-home market felt pressure, it would make it more difficult for Toll's buyers to sell their homes, he said.

"There are fundamental issues with consumer confidence and new household formation, and while unemployment is coming down, it is still too high," Yearley told the conference. Though college graduates are getting jobs, "they are not the ones they thought they would get."

In addition, "winter slammed us," Yearley said. Labor costs are still affecting the industry, and builders typically are not raising prices as aggressively as they did in the first six months of 2013.

Toll Bros. is raising prices, but in many cases the increases are reflecting the reality of the market. The best example is coastal California, where Toll acquired Shapell Industries' home-building division and 5,200 lots for $1.6 billion.

"We knew their pricing was too conservative, so the day after we closed on the purchase, we raised it $50,000," said Yearley, adding, "So far, so good."

Although some less-well-positioned lots there and elsewhere are being sold to raise $400 million to $500 million of Shapell's price, the continually improving California market now accounts for 25 percent of Toll's business, Yearley said.

"California markets need to be big to be successful," he said, but was quick to add that it would not be good business to be bigger than that.

Right now, 40 percent of Toll's business is in the Washington-to-Boston corridor, with the Dallas and Houston markets expanding fast.

Its City Living division in New York has seen sale-price increases from $1,000 to $2,000 a square foot, meaning that Toll "has ridden the [real estate] cycle with great luck and skill," Yearley said.

Toll also is attempting to grow its rental-apartment business, with 5,000 units in development, he said.