Luxury homebuilder Toll Brothers topped earnings views Tuesday, but downgraded full-year guidance on deliveries, as industry benchmarks show the housing market beginning to cool.
Last week, the National Association of Home Builders (NAHB) officially said the U.S. is in the midst of a housing recession. The announcement followed the release of August data showing a significant drop in builder confidence in the single-family housing market.
Buyer traffic has also fallen off, dropping to its lowest level since April 2014, aside from a brief dip lower in early 2020. Hiring in the construction sector dipped to a 4.5% rate in June. The post-Covid peak hiring rate of 10.4% occurred in May, 2020, coinciding with a rebound in home building and remodeling activity, according to NAHB data.
The number of open construction jobs is also starting to fall, declining from 405,000 in May to 334,000 in June.
"A housing recession is underway with builder sentiment falling for eight consecutive months while the pace of single-family home building has declined for the last five months," wrote head NAHB chief economist Robert Dietz.
Toll Brothers Earnings
Estimates: Wall Street forecast Fort Washington, Pa.-based Toll Brothers earnings of $2.30 per share, a 23% increase year-over-year. Sales were expected to grow 11% to $2.5 billion in the third quarter.
Results: Toll Brothers reported earnings grew 26% to $2.35 per share in the third quarter. Total sales increased 9% to $2.4 billion.
Toll Brothers reported cancellations on 13% of the contracts signed in the July-ended quarter. The number of homes delivered decreased 7% to 2,414. NAHB reported 20% of builders lowered prices in Q2 to avoid cancellations.
Outlook: Management lowered its full-year deliveries guidance. It now expects to deliver between 10,000-10,300 homes at an average price of approximately $920,000 in the fiscal year. The company also reaffirmed its full-year adjusted gross margin guidance of 27.5%.
A "Significant Decline In Demand"
CEO Douglas Yearley said in a statement there was a "significant decline in demand" in the third quarter, but that has changed in recent weeks. Average weekly deposits in the first three weeks of August were up 25% compared to July, according to Yearley.
"We continue to believe the long-term fundamentals underpinning the housing market remain firmly in place," Yearley said.
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Toll Brothers shares increased 1.4% to 46.28 Wednesday during market trading. The stock had dropped 2.2% after closing at 45.63 on Tuesday. Shares fell 3.7% Monday. TOL is attempting to fashion a bottom in an eight-month correction. It is about 40% below its high from December.
Toll Brothers topped earnings views in the second quarter. The building company saw earnings grow 83% to $1.85 per share while revenue increased 18% to $2.3 billion.
TOL stock has a 57 Composite Rating out of 99. It has a 29 Relative Strength Rating, an exclusive IBD Stock Checkup gauge for share-price movement that tops at 99. The rating shows how a stock's performance over the last 52 weeks holds up against all the other stocks in IBD's database. The EPS rating is 94.
Existing, Pending Home Sales Slow
The National Association of Realtors (NAR) reported on Tuesday that sales of built houses is slowing. Sales of existing homes — viewed as a preliminary indicator for new home demand as homeowners move up — in July dropped 5.9% from June and 20.2% year-over-year, according to NAR data. The median price also dropped around $10,000 compared to June, but is still up nearly 11% from last year.
Another measure of housing activity is pending home sales. This leading indicator is based on transactions in which contracts are signed, but the deal is not yet complete.
Pending home sales fell 1% in July after dropping 8.6% in June as mortgage rates pressured higher by Federal Reserve rate hike actions, combined with inflated housing prices, scared off potential buyers. The Pending Home Sales Index (PHS) is based on signed real estate contracts for existing single-family homes, condos and co-ops.
"We're witnessing a housing recession in terms of declining home sales and home building," chief NAR economist Lawrence Yun said in an Aug. 18 news release.
"However, it's not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price," Yun added.
Sales of newly constructed homes also fell around 30% year-over-year in July and dropped 12.6% compared to June, according to a joint report Tuesday from the US Department of Housing and Urban Development and the US Census Bureau.
Amid economic red flags, home building and real estate markets will pay close attention to Federal Reserve Chair Jerome Powell remarks on Friday, during the Kansas City Federal Reserve's annual Jackson Hole symposium.
There is little reason to expect Powell to diverge from his recent stance that the Fed can engineer a relatively soft landing for the U.S. economy. However, major questions remain — not least of which is the size of the impending rate hike on Sept. 21.
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