- Home prices and mortgage rates are high but haven’t hampered demand for what Toll Brothers calls its “luxury niche.” That niche is made up of empty nesters, rich millennials, and wealthy buyers who are inoculated from housing market swings.
More than half-a-century-old luxury homebuilder Toll Brothers has its wealthy homebuyers to thank for pushing it through a housing market at a standstill. Home prices soared throughout the pandemic, and mortgage rates that hit rock bottom reached levels unseen in decades after scorching inflation sent the Federal Reserve into a tightening cycle.
Economic conditions have changed, but home prices and mortgage rates are still high. It really hurts typical Americans, but the rich or anyone who has owned a home before are somewhat insulated for a couple of reasons. They are either unaffected by mortgage rates because they can buy a house in all cash (about 26% of Toll Brothers buyers paid all cash in the first quarter of the year); they can pull from their prior home that appreciated immensely over the past several years; or they simply have a high enough income to carry them through tough housing costs (the loan-to-value ratio for Toll Brothers buyers who took on a mortgage was about 68%, meaning they are putting down more than the median).
“Demand for our homes continues to be supported by our affluent customer base,” Toll Brothers chief executive and chairman Douglas Yearley said in an earnings call on Wednesday. “Over 70% of our business is luxury move-up and empty nester, which serves a wealthy cohort that has benefited from years of home price and stock market appreciation. The remaining 25% to 30% serves the more affluent first-time buyer, many of whom are older millennials buying their first home later in life when they have higher incomes and are more financially secure.”
It’s why Yearley is confident in the newly constructed home market ahead. “We continue to see the long-term outlook for the new home market to be very positive, particularly for our luxury niche,” he said.
Throughout this latest bust in the housing world, the new home market has topped the existing home market. Builders can craft smaller homes and offer price cuts, mortgage rate buydowns, and design upgrades, among other incentives that have helped offset drops in demand because of inflated costs. Not to mention, the existing home market is constrained by homeowners who refuse to sell and give up their low mortgage rate in exchange for a much higher borrowing cost, a phenomenon dubbed the lock-in effect. So all roads lead to a newly built home.
That doesn’t mean Toll Brothers was exempt from the pain. Yearley explained that affordability constraints did put some pressure on sales, especially in lower-tier markets or lower-end priced homes. But in all of California, for instance, demand was strong.
Toll Brothers’ net income and earnings per share came in below expectations, but according to Yearley, it was primarily because of impairments and a delay in the sale of a stabilized apartment. Its core homebuilding operations, on the other hand, met expectations. In the first quarter of the year, the homebuilder delivered 1,991 homes at an average price of around $925,000, creating home sales revenues of $1.84 billion. Toll Brothers reported that it signed 2,307 net contracts for $2.31 billion in the first quarter, up in units and dollars compared to last year. It owns enough land for more development, too, the company said.
Still, Toll Brothers shares fell almost 6% today on the news.
