Toll Bros. new home orders dropped fast as mortgage costs rose

Toll Bros., the Fort Washington-based builder of million-dollar homes, says it suffered a 60% drop in new orders during the three months ended July 31 — the latest sign that many Americans lost confidence in their economic prospects as food, fuel and borrowing costs rose earlier this year.

Signed contracts for future sales dropped to 1,266 homes, worth $1.7 billion, from 3,154 units, worth $3 billion a year earlier. Still, revenues from houses Toll had already built and sold were up modestly from a year ago, and company profits surged as it continued boosting prices faster than the rising costs of labor or land.

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Is the worst over? Chief executive Douglas C. Yearley Jr. told investors Wednesday morning that more would-be buyers visited Toll homes and websites and signed contracts in early August. The stock rose after he said he expects that long-term sales of large homes, apartments and rental homes will likely strengthen, citing population trends. Shares closed Wednesday at $46.22, up 1.3%, partly regaining the 2.6% lost after the company posted the weak order numbers Tuesday evening.

But “there is little consolation or ways to sugarcoat” the “dramatic” drop in new orders, home-stocks analyst Buck Horne told clients at Raymond James Financial Inc. in a report.

He added that the lower sales level compared to Toll Bros.’ performance in 2011, when the economy was still recovering form the Great Recession.

At about $47 a share, Toll’s price now reflects only the approximate “book value” of the properties it controls, and not future profits.

That’s a big change from last December, when Toll shares briefly topped $75, before inflation surged and the Federal Reserve accelerated interest rate hikes in hopes of slowing the economy and moderating prices.

In his remarks to investors, CEO Yearley blamed “steep increases in mortgage rates [and] significantly higher home prices.” Toll itself had been increasing prices by about 5% every three months until recently.

Yearley also faulted the drop in the stock market and higher consumer prices, which he said discouraged some home buyers, though not the wealthiest who buy larger homes. Toll says 20% of its buyers pay cash.

And the CEO cited “nonstop headlines” of a slowing economy.

The average U.S. 30-year, fixed-rate mortgage rate charged by banks and other lenders doubled, to a recent peak of 5.8% in June, from 2.9% last September, according to Freddie Mac, the mortgage lender financing company.

Rates have dropped in five of the eight weeks since then and averaged about 5.1% last week. But homebuilders are bracing for higher rates in the months ahead, as the Federal Reserve boosts its targets again. Shorter-term fixed-rate loans, favored by many Toll Bros. buyers, are modestly cheaper and carry lower fees.

An increase from 3% to 5% on a 30-year, $500,000 loan boosts monthly payments from about $2,600 to about $3,200 a month, discouraging those buyers for whom even the lower figure is a stretch.

“As soon as mortgage rates took off in reaction to rising long-term interest rates, housing demand cooled, and the euphoria that infected the housing market ended,” James M. Meyer, chief investment officer at Tower Bridge Advisors in Conshohocken, told clients in his daily investor note Tuesday.

But Toll contends that monthly payments are less important to its buyers, who may purchase homes from savings or the proceeds of other property sales.

The company says it still has a backlog of more than $11 billion worth of homes, for which buyers have already deposited about $80,000 each, nonrefundable. That should ensure plenty of business in the quarters ahead, according to Toll Bros.

And the company reported an increase in customer deposits for new homes in the early weeks of August, which suggests that demand may have stabilized “after the free fall of June and July,” analyst Horne concluded.

Toll remains highly profitable, keeping about 28 cents of every dollar it sold as gross profits, after expenses and before taxes. That’s up from about 26 cents a year earlier.