When luxury home builder Toll Brothers blew past quarterly sales and earnings views this week, it underscored how much distance lies between the higher end of the U.S. housing market and the lower end.
Although Toll's (TOL) stock price fell after it reported fiscal third-quarter results — amid a drop in new contracts during that quarter — the firm's otherwise robust returns show that there's plenty of money to be made in selling homes to buyers with deep pockets.
Those buyers include wealthy Americans who have grown even wealthier thanks to this year's stock market gains, economists say. They also include foreign investors who continue to buy homes in high-dollar markets within New York, California and Florida.
Meanwhile, builders on the lower end of the spectrum have run up against numerous challenges: rising home prices, declining inventory, an uncertain economy and the ongoing problem that many would-be buyers have in getting a mortgage.
These problems have hurt builders of first-time-buyer and midpriced homes. But they haven't greatly worried luxury builders or their clients — at least not yet.
"The wealthiest Americans are doing very well — income is up, wealth is up a lot, the S&P has doubled what it was a few years ago. This has certainly helped the higher end of the housing market," said Richard Green, director of the USC Lusk Center for Real Estate.
Stock Market Gives Boost
Sales of high-end homes have done particularly well in certain pockets of the country, Green says.
"Areas like the San Francisco Bay Area are very sensitive to stock market wealth, so it's no surprise that you see strong sales in those markets," he told IBD.
Lawrence Yun, chief economist at the National Association of Realtors (NAR), offers a similar view.
"The fundamental driver of growth in the high end, aside from job stability and income, is that people in this category have meaningful financial wealth tied to the stock market," he told IBD.
Among publicly traded builders, one of the biggest beneficiaries has been Toll. It specializes in luxury homes for move-up buyers, empty nesters and active adults in 19 states. Among its several brands are Shapell, a California luxury-home developer bought this year; and City Living, which specializes in luxury homes — including condos and townhouses — in urban areas.
On Wednesday, Toll logged a 53% year-over-year gain in fiscal Q3 revenue, while earnings more than doubled . Both results easily topped consensus analyst views.
The Horsham, Pa.-based builder was aided by a 12% year-over-year rise, to $732,000, in average price of homes delivered. Unit deliveries increased 36% to 1,444 units.
Toll's focus on higher-priced homes, some of which exceed $2 million, has given it a leg up over builders focusing on first-time and midpriced markets, analysts say.
PulteGroup (PHM), whose average selling price for homes delivered was only $328,000 last quarter, has recorded two consecutive quarters of profit declines.
D.R. Horton (DHI) — which builds first-time and move-up homes — posted a 24% decline in earnings last quarter. The drop came partly because the company's margins suffered when it offered price discounts in some markets as an incentive to lure buyers.
How Will Pricing Play Out?
In contrast, Toll has managed to keep its pricing structure in place.
"While we have seen some lessening of pricing power during the last year, we have not felt the need to incentivize to spur home sales," Toll CEO Douglas Yearley said in a statement accompanying the company's fiscal Q3 results.
Still, there are signs that demand might be slipping in some of the communities that Toll serves. Its net signed contracts for the quarter declined 6% from the previous year to 1,324 units. Toll also narrowed its guidance for full-year deliveries to a range of 5,300 to 5,500 homes from its previous range of 5,100 to 5,850.
"We believe the slower order pace was the contributing factor to management narrowing FY14 unit closing (delivery) guidance," Sterne Agee analyst Jay McCanless noted in a report.
An earlier McCanless report said, "The average Toll buyer may have a more difficult time finding a buyer for their house" in 2016 than in 2015.
There's little doubt that this year's higher home prices have had an impact on most segments of the U.S. housing market.
Last month, the Commerce Department reported that the average sales price of new single-family homes in July was $339,100 — a record high, up from $329,900 a year earlier. Purchases of new homes fell by 2.4% from the previous month to a seasonally adjusted annual rate of 412,000, the slowest pace in four months.
For existing homes — including houses, townhouses, condos and co-ops — the NAR says that total sales rose 2.4% in July to a seasonally adjusted annual rate of 5.15 million from a slightly downward-revised 5.03 million in June. July sales of existing homes continued a run of four straight monthly increases but were down 4.3% from the prior year.
Year-over-year sales of high-end homes continued to grow in July, however. The NAR reported that sales of homes priced from $750,000 to $1 million rose 0.5% in July. Sales of those priced $1 million or higher climbed 5%.
In contrast, sales of homes priced at less than $100,000 fell 12.9% in July, as sales of those priced from $100,000 to $250,000 slid 3.4%.
Unlike some of the lower-priced housing segments — which have seen the inventory of homes tighten in many markets — there are plenty of higher-priced homes available, the NAR's Yun says.
"People who want to trade up should not encounter too much friction at the high end because the inventory choices are more accessible," he said.
The problem is more on the other end of the spectrum, Yun says. "Baby boomers who want to sell their large home and move into a smaller, less expensive one will have more difficulty because there is less inventory at the lower end."