Stephen Kim : Great. Yes. No, I appreciate that. Second question I have relates to the impact of mortgage rates. And I know that you talked about the fact that your buyer is not as sensitive to mortgage rates in terms of affordability. And yet, your buyer is also fairly savvy. And mortgage rates right now are — we just had it reported at 6.4%. I mean it’s already down like 70 basis points or something like that in a very short period of time. The spreads are still super wide. I think it’s entirely possible you could see a mortgage rate come down meaningfully in the next six months. And so my question is, if that happens, do you think your buyer would — that you would see an improvement, a tangible palpable improvement in demand as your buyer opportunistically takes advantage of that? Or do you think your buyer is basically insensitive to rates regardless if they fall or rise — relatively insensitive, sorry, I should say?
Douglas Yearley : Okay. Yes. So I don’t think our buyer is even relatively insensitive to rates. I think they’re very smart. They’re wealthy and they are definitely aware of and focused on rates. Back in August, when we were all together, I spoke of some green shoots because rates have broken below 6 and we were encouraged for a few weeks. And of course, that went away as rates went up into the low to mid-7s. And now they are in, call it, the mid-6s. And there are some very, very modest green shoots of the last few weeks as rates have come down, but I am not ready to get sucked back into the conversation I had with all of you in August when we felt better because it’s just — we have Thanksgiving in the middle of this, and it’s just not enough time to understand if that move from 7.25% to 6.5% is enough to start triggering more demand.
It’s December, it’s not the timing of the year to really comment on that. And we got a bit burned by the comments that the industry made in August that didn’t play out. But longer term, if these rates can break through 6 and get into the 5s, I think we’re really going to be on to something. And I think that applies to whether it be first time or whether it be the Toll Brothers buyer. Our buyers are definitely wealthier, they have more equity in their homes, if in fact, they have a home that they’re going to be selling. There’s more cash that they put up. There’s lower leverage on the mortgage. And so we have a lot of good things going for us. But they are absolutely aware of and sensitive to where rates are moving.
Stephen Kim : Yes. That’s what I think as well. Thanks very much, Doug. Just as a clarification, though, can they lock the rate when they’re buying like through the end — through the close?
Douglas Yearley : They can lock — we can help them lock or they can lock a rate one year out, and that’s why delivery times for us coming down is very helpful because when we were quoting 14, 16 months in some of these communities that were so backed up, it was very difficult to lock. They can — let me explain when I say lock, they can cap a rate a year after, and it may flow down. They can lock a rate about 110 days before closing where they can definitively lock in a mortgage rate, but you can buy a cap as far as one year out.
Martin Connor : It may not be very attractive from a pricing perspective to the consumer but it’s available.
Douglas Yearley : But I do think if a buyer wants to buy a build-to-order home from Toll and it’s a, call it — let’s just say it’s a 13-month delivery, and they can’t do anything with it right now in terms of a lock and let’s say they have a home to sell, I think there may very well be some growing confidence over the next three to six months, that rates will be coming down when they can lock, call it, seven, eight, nine months out. And as those rates come down, that will make it easier for them to sell their existing home and we’ll give them a lower rate on the Toll home. And I think some people already feel that way. But I think that should grow as the Fed gets closer to being done with their business.
Operator: Our next question comes from Alan Ratner from Zelman & Associates.
Alan Ratner : Thanks for all the great detail so far. First question just on the margin guidance, and I certainly appreciate the disclaimer there about the unknown and the uncertainty I was just hoping to dig in a little bit more to the trajectory you guys have. Effectively, it sounds like it incorporates margins holding pretty flat through the year with the 1Q guide identical to the full year. Is there cost relief being assumed there that might be offsetting higher incentives and pricing pressure on specs as the year unfolds there? Is it mix driven? Why — I’m just trying to think through why margins would hold stable for the year in an environment right now that seems like it’s — pricing is under pressure?
Douglas Yearley : We haven’t built in cost reductions in the backlog. We continue to maintain high, what we call, building cost reserves or contingencies in our underwriting. And as for, Marty, sequentially through the year?
Martin Connor : I think the biggest factor in what would be perceived to be a declining margin environment that’s offsetting that is the lumber pricing inherent in our deliveries as the year goes on. Lumber fell steadily over the last few quarters, and that will be reflective and supportive of a more flat margin for 2023.
Douglas Yearley : You had that number — just from the third quarter to the fourth quarter, lumber dropped $12,000 to $14,000 per house just in one quarter there.
Alan Ratner : Okay. So basically, to think about that incentive number you gave earlier at 8%. It’s up probably 400 basis points, 500 basis points from nine months or so ago. A lot of that is being offset, at least as ’23 progresses through lower lumber on a per loan basis.
