Toll Brothers Inc (TOL): Is This the Beginning of the Housing Slowdown?

Housing starts and existing home sales stalled in June. Are rising mortgage rates and the institutionalization of the single-family home market starting to take a toll or is this just a pause?

The country’s housing market has a disproportionate impact on the economy. That was on clear display during the 2007 to 2009 recession. Over the last few months, it looked like things were improving here. However, that was partially driven by institutional buyers cleaning up lower priced and distressed inventory and interest rates sitting at historically low levels.

A look at some numbers

Both of these issues have now turned to drags. With most of the cheap inventory sopped up, first-time home buyers have to look at newly built homes. However, newly built homes are increasing in price. Toll Brothers Inc (NYSE:TOL)‘ second quarter ended in May. Sales were up nearly 60% year over year because of an almost 40% increase in the number of homes delivered and a 13% increase in the average sales price.

With prices for new homes heading higher, it’s getting more difficult to afford a home. Add on increasing mortgage rates and the picture looks even worse. Some of the heightened demand so far, in fact, could have been buyers trying to get in while costs were still low enough to afford, pulling demand from future periods.

That said, new orders at Toll Brothers Inc (NYSE:TOL) in the second quarter totaled 5,705 homes, up 27% versus the prior year. And its backlog was 6,163 homes, amounting to $1.9 billion. That’s an increase of nearly half a billion dollars. If home sales cool off for a period, Toll Brothers Inc (NYSE:TOL) should be in good position to keep earnings headed higher. However, if this slowdown marks the start of another downturn, Toll Brothers Inc (NYSE:TOL) will suffer along with all of the industry. Toll Brothers Inc (NYSE:TOL) looks more like a market timing bet right now than a long-term investment.

Institutional

That said, home prices are yet to fall. For example, according to Bloomberg, the median price of existing homes rose about 13% year over year, roughly matching Toll Brothers Inc (NYSE:TOL)’s experience with newly-built homes. That’s a good sign for the new batch of real estate investment trusts (REITs) that have already acquired big single-family home portfolios.

Silver Bay Realty Trust Corp (NYSE:SBY) and American Residential Properties Inc (NYSE:ARPI) are two direct play home owners in that space. Silver Bay Realty Trust Corp (NYSE:SBY) owns around 3,400 homes in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, and Texas. American Residential Properties Inc (NYSE:ARPI) owns 2,500 homes in the same states, plus Illinois, Indiana, and South Carolina. Altisource Residential is another single-family home REIT, but it’s buying distressed mortgage debt and using foreclosure to build its portfolio. That’s a much different proposition.