- The Washington Times - Tuesday, November 8, 2005

PHILADELPHIA (AP) — In a possible sign of trouble for the housing industry, luxury home builder Toll Brothers Inc. cut its sales forecast for fiscal 2006 yesterday, citing delayed openings for new developments and weakened demand in several markets.

Toll Brothers’ shares tumbled nearly 14 percent yesterday and the news pushed down share prices for many large home builders as Wall Street, already nervous about the health of the housing sector, was rattled by the news. KB Home fell 5.5 percent and Pulte Homes Inc. lost 8.9 percent.

A national housing sector index, a benchmark maintained by the Philadelphia Stock Exchange based on share prices for 21 companies in the U.S. housing construction market, closed 5.4 percent lower.

The strong housing market is widely credited for propping up the economy, but concerns about its sustained health have been increasing along with the upward creep of mortgage rates. The Philadelphia exchange’s index is down 18 percent from its midsummer peak.

Rates on 30-year mortgages have climbed to the highest level in 16 months, and have been above 6 percent for the past month.

Toll Brothers, based in Horsham, Pa., projected sales of between 9,500 and 10,200 houses in fiscal 2006, down from an earlier target of 10,200 to 10,600 houses. In fiscal 2005, it reported 8,769 sales.

“The shortage of selling communities, coupled with some softening of demand in a number of markets, negatively impacted our contract results,” said Robert Toll, chairman and chief executive officer. “It appears we may be entering a period of more moderate home price increases, more typical of the past decade than the past two years.”

Houses in new communities were taking longer to go on the market, a delay the company attributed to an increasingly complex regulatory environment. Roughly one-quarter of Toll Brothers’ communities have backlogs of at least 12 months for houses to be built, and are not available for sale on a regular basis, it added.

For the fourth quarter, the backlog jumped 36 percent to $6.01 billion, while contracts to build rose 4 percent to $1.59 billion.

Toll Brothers also cited lagging consumer confidence stemming from Hurricane Katrina and rising energy prices.

Analysts said Toll Brothers was in a unique situation and volume for the builder was more than triple its average.

In a research report yesterday, Lehman Brothers assured investors that Toll Brothers’ troubles were company specific, not sectorwide, and said it would retain its “equal weight” rating on the stock. Other builders have recently reported strong results and positive outlooks, the report said.

Toll Brothers’ concentration in the Mid-Atlantic region puts it in a tougher climate than other home builders, said Gregg Schoenleber, an analyst with Deutsche Bank North America. About 30 percent of Toll Brothers’ market is in the Mid-Atlantic — compared with builders like Pulte Homes with 8 percent, D.R. Horton Inc. with 9 percent and KB Home with virtually none in the region, he said.

Municipalities in the region, concerned about the strain of development on schools and roads, often have more restrictions when approving new developments than places like Colorado and Texas, where such approvals are easier to get, he said.

“It’s not all a function of [decreasing] demand by any stretch; a big part is entitlement delays,” Mr. Schoenleber said.

He said it’s not clear whether Toll Brothers’ home prices at an average of $633,000 — are too high. In some New England markets, for example, “that’s considered a teardown,” he said.

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