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A sign of bad news for homebuilders?

Famed builder Toll Brothers Inc. cuts its sales forecast, and homebuilders' stocks drop as a result.

Published November 9, 2005

In a possible sign of trouble for the housing industry, luxury home builder Toll Brothers Inc. cut its sales forecast for fiscal 2006 Tuesday, citing delayed openings for new developments and weakened demand in several markets.

Toll Brothers' shares tumbled nearly 14 percent in trading Tuesday and the news pushed down share prices for many large homebuilders as Wall Street, nervous about the health of the housing sector, was rattled by the news. KB Home fell 5.5 percent and Pulte Homes Inc. lost 8.9 percent.

Of the top 20 percentage losers on the New York Stock Exchange, 16 were home builders.

A national housing sector index, a benchmark maintained by the Philadelphia Stock Exchange based on share prices for 21 companies in the U.S. housing construction market, closed down 5.4 percent.

The strong housing market is widely credited for having supported the economy for some time, but concerns about its sustained health have been increasing along with the upward creep of mortgage rates. The Philadelphia exchange's index is down 18 percent from its midsummer peak.

Rates on 30-year mortgages have climbed to the highest level in 16 months, and have been above 6 percent for the past month.

Toll Brothers, based in Horsham, projected home sales at between 9,500 and 10,200 homes in fiscal year 2006, down from a target of 10,200 to 10,600 homes. In fiscal 2005, it reported 8,769 sales.

"The shortage of selling communities, coupled with some softening of demand in a number of markets, negatively impacted our contract results," said Robert Toll, chairman and chief executive officer. "It appears we may be entering a period of more moderate home price increases, more typical of the past decade than the past two years."

Houses in new communities were taking longer to go on the market, a delay the company attributed to an increasingly complex regulatory environment. About a quarter of Toll Brothers' communities have backlogs at least 12 months for houses to be built, and are not available for sale on a regular basis, it said.

In Florida, Toll Brothers offers residential real estate offerings along the gulf coast from Tampa and Sarasota south to Naples, as well as in Palm Beach Gardens, Boca Raton and Delray Beach. The company on Tuesday did not comment specifically on its Florida market.

For the fourth quarter, the backlog jumped 36 percent to $6.01-billion, while contracts to build rose 4 percent to $1.59-billion.

Toll Brothers also cited lagging consumer confidence stemming from Hurricane Katrina and rising energy prices.

Analysts said Toll Brothers was in an unusual situation and volume for the builder was more than triple its average.

In a research report Tuesday, Lehman Brothers assured investors that Toll Brothers' troubles were company-specific, not sectorwide, and said it would retain its "equal weight" rating on the stock. Other builders have recently reported strong results and positive outlooks, the report said.

Toll Brothers' concentration in the mid Atlantic region puts it in a tougher climate than other home builders, said Gregg Schoenleber, an analyst with Deutsche Bank North America.

Some 30 percent of Toll Brothers' market is in the mid Atlantic - compared to builders like Pulte Homes with 8 percent, D.R. Horton Inc. with 9 percent and KB Home with virtually none in the region, he said.

Municipalities in the region, concerned about the strain of development on schools and roads, often have more restrictions when approving new developments than places like Colorado and Texas, where such approvals are easier to get, he said.

"It's not all a function of (decreasing) demand by any stretch; a big part is entitlement delays," Schoenleber said.

He said it's not clear whether Toll Brothers' home prices - at an average of $633,000 - are too high. In some New England markets, for example, "that's considered a teardown," he said.

For the fiscal year ended Oct. 31, Toll Brothers' home building revenue climbed 50 percent to $5.76-billion, while contracts increased 27 percent to $7.15-billion.

Its shares dropped $5.50, nearly 14 percent, to $33.91 in Tuesday trading on the New York Stock Exchange, down from a 52-week high in July of $58.67. KB Home shares fell $3.71 to $63.74 on the NYSE, while Pulte shares fell $3.70 to $37.77.

[Last modified November 9, 2005, 00:39:17]

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