Toll Brothers reports lowest quarterly sales in nearly a decade

As higher interest rates weigh on the housing market, Toll Brothers TOL reported a decline in demand for its homes and a spike in canceled deals in its most recent quarter.

The luxury homebuilder posted quarterly results that exceeded Wall Street expectations, with earnings per share at $5.63 against $3.96 expected by Wall Street analysts, according to data from S&P Capital IQ.

Revenues in Q4 were $3.71 billion, more than the $3.21 billion expected by analysts. In the fourth quarter, Toll Brothers recorded home sales revenue of $3.58 billion on 3,756 homes. The company had predicted Q 4 deliveries of 3,250 to 3,550 homes.

On Wednesday, shares of Toll Brothers went up more than 7%.

Toll Brothers said new contracts fell 60% from the same period last year to 1,186 in its fourth quarter, with the dollar value of new orders declining 56% from a year earlier in the year.

In the period, contracts were canceled by 20.8% of new deals, the highest since 2009. Cancellations were up from 1.3% in the previous year to 2.9% of the company's total backlog in the quarter.

Many homebuyers are on the sidelines, waiting for clarity on the direction of mortgage rates and the overall economy, Douglas C. Yearley, Jr. chairman and chief executive officer, said in the company's earnings release.

The company expects to deliver 8,500 homes to the market by next year, despite a backlog of nearly 8,100 homes valued at $8.9 billion.

The contracts in backlog are supported by sizable nonrefundable down payments of around $83,000 per home, Yearley said on the earnings call.

The S&P Homebuilders Select Industry Index has fallen 30% this year, and the shares of Toll Brothers are down 30% this year.

After two red hot years for the U.S. housing market, the Federal Reserve s aggressive tightening campaign to combat inflation has seen mortgage rates go up, leading to a run-up in borrowing costs and cooling demand.

Yearly said on the earnings call that we continue to assess and adjust where necessary product offerings, price and incentive levels are in each of our communities, taking into account local market dynamics, including elasticity of demand.

As rising mortgage rates put a strain on the housing market, sales of previously owned homes fell for a record ninth month in October. According to the National Association of Realtors, contract closings fell 5.9% to an annualized pace of 4.43 million last month.

The slowdown has also taken a toll on lumber prices, which fell to the lowest level since June 2020.

New home construction continues to drop as builders deal with a retreat in housing demand. According to government data, residential housing starts decreased by 4.2% last month to a 1.43 million annualized rate. Single-family homes started for construction dropped to an annualized 855,000 rate, the lowest since May 2020.

The housing market has gone into a frenzy over the last two years because of a pullback in near-term activity.

The long-term prospects for the housing market remain positive despite recent weakness, Yearley said. There is a shortage of homes in America as housing starts have not kept pace with population growth for at least the past 15 years.