Toll Brothers reported better-than expected fiscal third-quarter earnings and revenue late Tuesday, buoyed by increased home deliveries and surging unit prices. The luxury homebuilder forecasts new home prices will continue to soar through the end of the year as the latest housing market data shows existing-home sales dropped in July, continuing the 2023 trend.
Homebuilders have rallied aggressively this year, as rising interest rates have slowed sales of existing houses, driving demand and prices for newbuilt homes.
The National Association of Realtors on Tuesday said existing-home sales fell 2.2% in July, down nearly 17% vs. 2022, to a seasonally adjusted annual rate of 4.07 million. Meanwhile, the median existing-home sales price rose 1.9% from a year ago to $406,700.
"Two factors are driving current sales activity — inventory availability and mortgage rates," NAR Chief Economist Lawrence Yun said in a press release. "Unfortunately, both have been unfavorable to buyers."
Toll Brothers stock gained 3.8% to 78.77 Wednesday during market trade as the Mortgage Bankers Association's seasonally adjusted index showed mortgage rates increased last week to the highest level in 23 years, pushing mortgage demand to 28-year lows.
Applications for a mortgage to purchase a home dropped 5% last week and were down 30% vs. the same week in 2022, according to the Mortgage Bankers Association.
On Tuesday, TOL shares gained 1.2% to 75.92.
Toll Brothers Stock: Earnings
Estimates: Analysts predicted earnings growing 21% to $2.85 per share, with revenue declining 4% to $2.4o billion.
Results: Toll Brothers reported revenue up 8% to $2.68 billion in Q3. Meanwhile, the homebuilder saw EPS grow 59% to $3.73.
The company's home-sales revenue totaled $2.7 billion, up 19% compared to 2022, as Toll Brothers delivered 2,524 homes. Toll Brother's quarterly deliveries were up 5% vs. Q3 2022, beating the company's forecast of between 2,350-2,450 units.
Meanwhile, the company also reported that its backlog value at the end of Q3 totaled $7.9 billion, down 30% compared to last year.
Outlook: Toll Brothers forecasts Q4 deliveries between 2,650-2,750 units. The luxury homebuilder also expects the average price per unit in the fourth quarter to be between $1.005 billion-$1.025 billion.
For the full year, the company predicts between 9,500-9,600 home deliveries with an average home price between $1.005 billion-$1.015 billion. At the end of Q2, Toll Brothers forecast full-year deliveries of 8,900-9,500 with an average delivered price per home between $975,000-$995,000.
CEO Douglas Yearley sounded optimistic about the housing market in the earnings release Tuesday.
"Our third-quarter performance reflects a market for new homes that continues to benefit from historically low levels of resale inventory, favorable long-term demographic trends and the persistent underproduction of homes for well over a decade," Yearley said.
He added that while rising interest rates remain a challenge in the housing market, "they further cement the lock-in effect that has kept resale inventory at historically low levels."
Toll Brothers stock has gained 48% in 2023, outperforming the S&P 500 index's 15% gain. TOL stock has built a flat base with a 83.72 buy point, according to MarketSmith analysis.
The broader IBD Building-Residential/Commercial industry group has also performed well in 2023, with the 23 stocks collectively jumping more than 33%.
U.S. Housing Market
The U.S. is in a long-term housing shortage, with the construction of new homes failing to keep pace with the growing population. Rising material costs, supply-chain issues and labor shortages since the Covid pandemic have exacerbated the issue.
The shortage is currently running at a deficit of about 5.5 million homes, according to the National Association of Realtors. The gap is so large it would take more than a decade to close, NAR says, even if new-home construction accelerates.
In July, new-home sales grew following a drop in June, according to Commerce Department data released Wednesday. Sales of new single‐family houses in July were at a seasonally adjusted annual rate of 714,000, up 4.4% compared to June and an increase of 31.5% vs. July 2022.
Prices remained strong and demand steady as high mortgage rates left owners of existing homes holding tight — not wanting to sell and move up into more expensive mortgages.
The key determinant of interest rates for mortgages is the federal funds target rate set by the Federal Reserve. This rate determines the overnight lending rate among U.S. banks.
The Fed, attempting to cool rapidly rising inflation, has repeatedly raised its target rates since the beginning of 2022. Higher interest and mortgage rates tend to reduce housing demand, which theoretically should help cool inflation. It also helps keep the supply of existing homes low.
Meanwhile, housing prices rose 0.4% month-over-month in both June and July, according to the Aug. 10 CPI report. The bump in home prices accounted for more than 90% of the overall CPI increase, the Bureau of Labor Statistics noted.
Toll Brothers stock ranks third in its housing market industry group. TOL has a muscular 96 Composite Rating out of 99. The stock also has a 96 Relative Strength Rating. The EPS Rating is 97.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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