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Toll Says Unsold Housing Inventory Could Burn Off Soon
With inventories “burning off” in many of the nation’s housing markets and home buying incentives on the decline, it could be only a matter of months before the housing industry is in the position to start moving out of the downturn that commenced in late 2005 and early 2006, Robert Toll, chairman and chief executive officer of Toll Brothers, told Citigroup’s Global Industrial Manufacturing Conference in New York on March 8.
“When will the inventory burn off? I don’t know,” Toll said. “We’re running at half the pace of inventory of three months ago,” and it could be “another four or five months before you burn off inventory in most of the markets.” In some markets, however, it appears that it “will take a lot longer.”
In the last five weeks, Toll said, his company’s sales cancellation rate has declined to 16%, down from a recent high of 36%, but it’s still “horrible because our average cancellation rate is about 7% since being in business.”
Tracking the inventory of unsold homes that materialized from the high levels of speculation at the height of the boom market “is key to the analysis of where home builders are,” he said. Market conditions suggest that the duration of the current major housing downturn could come in a bit shorter than the last recession in the early 1990s.
“We will be back,” Toll predicted. From the tail end of 1987 through 1991, his luxury home building company saw net profits dwindle from $28 million to a low point of about $5 million. It took about two years to return to the previous high, he said, “and then we kept right on going.”
The current down cycle has reduced total profits from roughly $800 million to a mid-range forecast for fiscal 2007 of about $270 million, he said.
Surprisingly, Toll said, “we still have speculative investment going on in the market today and we’ve done everything we can to stop it.” That includes having buyers sign multiple documents testifying to the fact that they intend to live in the home and are not investors, and going so far as to check county records to ensure that the buyer doesn’t already own two or more properties in the jurisdiction, in which case “something is not right.”
Among markets where Toll may already be on the comeback trail, he said, are the east coast of Florida, Northern Virginia and California. The west coast of Florida, on the other hand, “went so deep into the hole we don’t know if we’ll ever drag ourselves out." In New England, and Massachusetts specifically, things are still getting worse rather than better, he added.
Turning With a Vengeance
“As soon as the market turns, we think it will turn with a vengeance,” Toll said, and he noted that in markets where builders have been able to reduce home buying incentives or even raise prices there is a big boost in the confidence level of prospective buyers. In the past couple of weeks, he said, Toll had raised prices in 15 communities.
Toll cited several trends from which he derives confidence in the outlook for his housing business:
- Households with incomes of $100,000 and up — the target buyers for his homes, which average almost $700,000 compared to half that amount among competing public builders — are growing 5.4 times faster than all U.S. households.
- Household and population growth are expected to remain strong. Despite a population increase of 80 to 85 million since 1970, the same number of homes on average is being produced. However, a huge number of the 1.8 million starts in recent years — 400,000 to 450,000 — have been second homes. To keep supply in balance with demand, the nation probably ought to be producing 2.5 million new homes annually, but the increasingly lengthy entitlement process in developed areas reflects the political impossibility of reaching that level. “Nobody wants to see something built in their back yard,” he said. And nobody wants to see the development of the farm field across the street even if it’s $ 2 million homes on three-acre lots.
- Mortgage interest rates remain favorable.
Pretty Significant Price Rises
“Once you get through the overhang in the market of speculative housing, price rises will be pretty significant,” he said, predicting that the U.S. is on track to repeat the experience of England and other parts of Europe in the past few years, where half of household income goes to housing, “leaving very little for going to the movies or out to dinner.”
Toll said that housing shortages will be felt “much more rapidly as we come out of this downturn, because much less is being fed into the entitlement grinder.” In Westchester County, N.Y., it can take three years to get housing into production once the land is obtained. “In New Jersey, you are lucky to get production in six years. This will be a serious factor during the rebound.”
Toll added that he hasn’t noticed a significant decline in the price of land, although it has become easier to negotiate better terms for acquiring it.
The crackdown on subprime lending has so far not had any major fallout for his company, he said, but it could pose more of a challenge for the first-time buyer market.
Exaggerated news media reports about deteriorating conditions in the housing market continue to erode consumer confidence, he said. “The New York Times every four or five days writes an article on how stupid you’ve got to be to buy a home, which has an impact on confidence in the market.”
But “what can hurt us the most” and “what keeps me up at night” are developments in the big economic picture, he said, such as the stock market jitters that occurred in the past two weeks. There’s nothing builders can do about that, he said, but in the meantime economic conditions still remain “decent.”
 Is the Housing Correction Over? Attend Construction Forecast Conference
Will housing demand outweigh affordability hurdles, inventory overhangs and the retreat of investors? Where are home prices headed?
Get the answer to these and other questions at the Construction Forecast Conference — Spring 2007 on April 26 in Washington, D.C.
Panels of nationally recognized experts will discuss economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys at the day-long conference.
For more information and to register, click here.
Can't Attend? Webcast of Conference Also Available
The conference is also available via Webcast. For Webcast information, visit www.nahb.org/cfcwebcast.
 Want to Know the Housing Starts Through 2015?
Find out in HousingEconomics.com’s Long-Term Forecast.
HousingEconomics.com includes downloadable Excel tables featuring the housing starts forecast, GDP, demographics and more.
To learn more, visit www.housingeconomics.com.
 NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into the middle of the year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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