Toll Brothers: A Slowdown Continues In November, Guidance Holds Hope

It was the soundbite on the U.S. housing market heard from near and far:

Despite a healthy economy, we are seeing a moderation in demand. Fourth quarter contracts declined 15% in dollars and 13% in units compared to a difficult comp from 1 year ago. Fourth quarter demand flowed to a per community pace more consistent with fiscal year 2016’s fourth quarter, which was still strong.

In November, we saw the market further soften, which we attribute to the cumulative impact of rising interest rates, rising home prices and the
effect on buyer sentiment of well-publicized data of a housing slowdown. We saw similar consumer behavior in late 2013 when a rapid rise in
interest rates temporarily tempered buyer demand before the market regained momentum.

Toll Brothers Q4 2018 Transcript (December 4, 2018)

The second paragraph, the portion seemingly most referenced, from the Toll Brothers (TOL) Q4 earnings call sounded like the housing slowdown is itself he cause of the slowdown. That is, if not for bad sentiment getting reinforced by bad press, the housing market might be a lot better. After all, the fundamentals of the economy remain strong:

Household formations are increasing. The economy is growing. The nation is experiencing the lowest unemployment rate in many decades, and consumer confidence is near an all-time high. In the past few years, many of our customers have enjoyed wealth creation through the stock market, home price appreciation and salary increases…

30-year mortgage rates remained quite low compared to historical norms and have come down a little bit in the past few weeks. And the 30-year
jumbo rate is currently about 0.375% below the conforming rate. The credit policies of mortgage lenders are much more disciplined than in the last cycle.

The logic makes sense except investors have ignored this same logic almost all year as home builders like TOL have suffered tremendous selling pressures. The immediate reaction to TOL’s earnings swiveled all over the place: from a 10% gap down to a 2.4% gain at the intraday high to a 1.6% loss to end the day. Since then, TOL tried and failed two more times to break through the resistance from the post-earning intraday high. Sellers have taken over the last two days, closing TOL below its downtrending 50-day moving average (DMA).

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Disclosure: Long PHM

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