HOMEBUILDER CEO: The American Housing Recovery Is Only Beginning (TOL)

Sam Ro

Toll Brothers, one of America's largest homebuilders, announced fiscal Q3 financial results that were stronger than expected.

Earnings came in at $0.26 per share versus analysts' expectation for $0.25.

Total revenues surged 24% to $689 million, and units climbed by 10%.

Toll is obviously benefiting from the ongoing U.S. housing recovery.

But in recent months, interest rates have been climbing, pulling mortgage rates up with it.

Currently, the average 30-year mortgage rate is 4.4%, up from 3.6% a year ago.

In theory, this should be bad for builders as it raises the cost of the home for home buyers.

But Toll Brothers CEO Douglas Yeardley isn't breaking a sweat.

"Sales volumes and pricing power both increased this quarter from one year ago, a pattern consistent with recent quarters," he said. "We believe the recovery is real and we are in the early stages of the rebound. Our average sales contracts per community are about where they were in 1997-1998, several years into the previous cyclical recovery. From there, over the next seven years, through August 2005, a period when mortgage rates averaged between 5.8% and 8.1%, sales contracts per community continued to increase, eventually peaking at twice that pace."

"The University of Michigan consumer sentiment survey, though down slightly from last month's six-year high, is up significantly from one year ago, as is the Conference Board's similar survey," noted executive chairman Robert Toll. "Inventory levels are still tight in almost all of our markets and housing remains very affordable. Unemployment trends are slowly improving and demand, based on household formations, is compelling, especially given the still very-low volume of industry home production."

Every month, the Federal Reserve has been buying $85 billion worth of bonds in its efforts to keep interest rates low. But in May, it began signaling that it could soon taper or reduce those purchases.

This has sent mortgage rates higher.

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