Toll Brothers Earnings: Speculative Strategy Pays Off Amid Stronger Demand and Tight Supply

Despite the U.S. housing market slowdown, Toll Brothers TOL reported good fiscal second-quarter results (ended April 30), with key performance metrics all exceeding management’s guidance. Toll Brothers delivered 2,492 homes during the quarter, which came in well above midpoint guidance of 2,100 deliveries. This outperformance was due to reduced construction cycle times (that is, how long it takes to build a home) and management’s strategy to build more speculative homes (that is, starting construction without a sales contract in hand). Because approximately 90% of outstanding mortgages have a rate under 5%, many existing homeowners have been reluctant to sell their homes (known as the “rate lock-in effect”), and the supply of existing for-sale homes remains low. Yet, home demand appears to have been surprisingly solid during the spring selling season despite elevated mortgage rates. As such, more would-be buyers have turned to new construction. Approximately 40% of Toll Brothers’ new orders during the quarter were for spec homes, and management is comfortable with this sales mix going forward to capitalize on the limited supply of existing homes for sale.