Toll Brothers Raises Home Prices and Reduces Incentives

Toll Brothers (TOL) is a high-end homebuilder with communities in 21 states. Its chairman and CEO, Robert Toll, is considered an expert on the housing market, and analysts closely follow his prognostications and market positioning.

During its Q3 earnings call in late August, TOL announced that it reduced incentives and increased prices in some of its stronger markets: Mid-Atlantic and Northeastern territories, Florida (especially the West Coast), and Northern and Southern California. The preliminary Q4 outlook released this week confirms that TOL’s stronger price position is working. Sales and revenues surprised to the upside:

“FY 2009’s fourth-quarter net signed contracts of approximately 765 units and $430.8 million rose 42% in units and 62% in dollars compared to FY 2008’s fourth-quarter totals…These increases were achieved despite having fewer selling communities.”

TOL’s overall market has decreased in size, but the company also has fewer competitors and greater market share.

During the conference call Q&A, analysts asked for more specifics on pricing. (Conference call info from Seeking Alpha transcripts). TOL was a little more guarded with pricing information this time, but the company did describe an $8000 reduction in incentives for future sales. TOL also noted that sales have been more volatile since Labor Day. This volatility has somewhat reduced TOL’s pricing power, but at the same time, the company has only reduced prices in a few, select communities.

The homebuyer tax credit indirectly impacts TOL’s business. CFO Joel Rassman explained that the tax credit gives salespeople an additional tool for converting latent or pent-up demand into actual purchases of homes:

“…obviously on a mathematical basis for a firm selling homes at an average price of $600,000 approximately, getting a $6500 tax credit if you’re not a first time home buyer, getting $8,000 if you’re a first time home buyer, can’t be determinative of whether the sale is to be made, but what it does do is give us a great opportunity to have another reason to call a client that we’ve seen once, twice, or five times, and we have noticed over the past year that our clients want to be called. They want the excuse. They want the reason to come out and buy the home. I think the overwhelming benefit of the tax credit, as it has been passed for us, is to give us our salespeople that excuse to once again making contact for the future with potential clients to try and drive them off the fence and into our home buying fold.”

Look for TOL to continue to hold its ground on pricing as the housing market continues to stabilize.

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