Lux Builder's Sales Drop Due to Sticker Shock?

December 12, 2013

Luxury homebuilder Toll Brothers reported a 10 percent decline in sales contracts in recent weeks, and analysts, along with the company, are saying it may be due to sticker shock by customers. 

In the past year, Toll has increased its average selling price by 21 percent to $703,000. 

"Toll's buyers have more discretionary income, but even they have decided that the pricing pace has been too aggressive," Vicki Bryan, a senior analyst with credit-rating service Gimme Credit LLC, told The Wall Street Journal. "This sets the tone for the next two quarters in terms of pricing.”

While sales typically decline over the winter months, investors say they are surprised by the amount that sales have dropped for the company. Toll executives on a conference call Tuesday with investors and analysts said the drops were likely due to several factors: price increases, uncertainty about the federal budget, and interest rates that rose a full percentage point between May and September.

Toll’s financial results are closely watched by the housing market as a gauge for the high-end market, The Wall Street Journal reports. 

While the company reported a decrease in sales, it did report a 65 percent jump in revenue in its fourth quarter compared to a year ago. The increase was largely attributed to its price increases. 

"We will, I'm quite confident, stay flat [in sales contracts] through the New Year, because there's just not a lot of action," Toll CEO Douglas Yearley said on the conference call. "We still feel like pent-up demand is improving, demographics are on our side, affordability is in place, and we're cautiously optimistic about the spring season."

Toll’s forecast for 2014 includes home deliveries with an average selling price of $670,000 to $720,000, and the company plans to deliver between 5,100 to 6,100 homes. In 2013, it delivered 4,184 homes. 

Source: “Toll Brothers Hits Limits of Luxury-Home Prices,” The Wall Street Journal (Dec. 10, 2013)

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