Imagine this: Straight talk on the housing market

July 25, 2007, 6:34 PM UTC
Fortune

Reading word of the debacle at class-act mortgage lender Countrywide (CFC), I couldn’t help thinking about a fascinating interview my colleague Jon Birger did recently with Bob Toll, eternal optimist and CEO of luxury home builder Toll Brothers (TOL). When I read the Q&A in the magazine, I was struck by how there seemed to be a sub-text to everything Toll said, a sort of What-He-Says versus What-He’d-Say-If-You-Injected-Him-With-Truth-Serum. So with apologies to Jon and Bob, here is an imagined annotation to Toll’s responses, were he being more candid than the situtation allowed. (To read the full interview, follow the link above. I’ve edited it for space below. The bold are Birger’s questions, the plain text are Toll’s published answers, and the bit in italics is my contribution.)

How bad is it out there?

I don’t see the market getting better until, at the earliest, April of 2008. But I do think that when a recovery occurs, it will be much quicker than it has in the past because of pent-up demand.

Sounds good. Of course we all know there is no pent-up demand for homes. Everyone who wanted one bought one. Or Two. Or Three. Gosh, I loved the early 2000s. By the way, I just know Countrywide will predict no recovery until 2009. Most folks will find them more believeable than me.

Weren’t you worried about speculation in Florida and elsewhere during the boom?

There wasn’t anything we could do about it. We would make people sign in triplicate swearing up and down that they weren’t speculators, but we couldn’t control whom the builder next door was selling to.

Worried? Are you kidding me? We LOVED it. Do you realize how much our stock went up in three years?

Some analysts think new-home prices would have fallen even further if not for all the incentives – high-end kitchens and the like – that builders are offering.

When you start selling homes for $400,000 that were $500,000, all the homeowners who paid $500,000 are going to be in your sales office complaining, saying, “Why are you doing this to me? Why don’t you just put a sign on my lawn saying, ‘I’m a schmuck?’ ” So you’ve got to give incentives instead of lowering prices because you don’t want to be rude, crude and barbaric to your clients.

Believe it or not, most are too stupid to realize that the giveaways are the same thing as lowering the price. Is America great or what?

There’s been a lot of speculation that with homebuilder stocks down so much, they might be takeover targets for private-equity funds. Do you see that happening?

I think that every builder has been approached and had conversations, but obviously they haven’t gone anywhere. Say an LBO fund approaches a builder, saying, “Look, your stock was $50, it’s now $25. I’ll give you $30.” Well, why should I sell for $30 when every time the market has come back we’ve gone to new highs?

It’s a good negotiating position, don’t you think? Look, I’m a smart guy. I know that $30 is a GREAT price because we’ll never see another housing boom like the last one in anyone’s lifetime. Truth is, I doubt even the shopaholic private-equity guys would pony up for overvalued stocks like homebuilders right now.