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Some Economists Fear This Time Will Be Different

A report from MarketWatch. “Shares of Toll Brothers Inc. dropped Tuesday, after the home builder reported fiscal fourth-quarter earnings and revenue that beat expectations but said the housing market slowed further in November, particularly in California. Chief Executive Douglas Yearley said that despite a healthy economy, there was a ‘moderation’ in demand during the quarter, as contracts declined 15% in dollars and 13% in units.”

“‘In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown,’ Yearley said. ‘California has seen the biggest decline.'”

From CNBC. “First quarter guidance from Toll Brothers was weaker than expected, with a deliveries range that was markedly below Wall Street’s expectation, according to FactSet.”

“Yearley said the company ‘saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum.’ Known as the taper tantrum, rates jumped in 2013 when the Federal Reserve signaled a reduction of money being put into the economy, leading to a surge in mortgage rates. Home sales recovered, however, when mortgages rates fell back again.”

“Some economists fear this time will be different. Lawrence Yun, chief economist for the National Association of Realtors, said in November that “‘this time, interests rates are not going down.'”

“‘In fact, they are probably going to increase even further,’ added Yun.”

From Reuters. “Toll, whose homes can cost upwards of $2 million, said orders, a key indicator of future revenue, dropped 13.3 percent to 1,715 units in the quarter ended Oct. 31, against the 6.5 percent rise expected by analysts.”

“Orders fell the most in California, Toll’s biggest market by revenue, declining 39.4 percent to 226 units in the quarter, the company said. ‘Significant price appreciation over the past few years, fewer foreign buyers in certain communities, and the impact of rising interest rates, all contributed to this slowdown,’ Chief Executive Officer Douglas Yearley said, referring to the California market.”

“‘We continue to find Toll in a particularly difficult position given its high California exposure, with unsustainably high gross margins in the state,’ Barclays analyst Matthew Bouley wrote in a note.”

“Analysts also said Toll’s margins may have been hurt by higher marketing incentives offered by the company to lure buyers. Last month, No.1 U.S. homebuilder D.R. Horton also said it was seeing a rise in incentives in the face of choppy demand as it forecast first-quarter home sales below analysts’ estimates.”

“Toll forecast first-quarter homes sales in fiscal 2019 between 1,350 and 1,550 units, below the 1,554 units expected by analysts on average, according to IBES data from Refinitiv. The company did not provide a forecast for the full year, citing uncertai”n demand.

This Post Has 49 Comments
  1. Orders fell the most in California, Toll’s biggest market by revenue, declining 39.4 percent to 226 units in the quarter…’fewer foreign buyers’

    And these foreign buyers were moving here? I kinda doubt that. Sounds like pointless speculation.

  2. “…fewer foreign buyers in certain communities…”

    Chinbabwe’s money printing – like nothing we’ve ever seen before in history – had a huge impact on real estate prices worldwide. Homegrown speculators happily joined them.

    1. money printing

      Credit expansion is a wealth extraction scheme. It doesn’t create wealth, only a mechanism to skim. Having that skimmed money leave the country leaves China poorer than it was before the credit expansion, which is pretty poor.

      1. I think of it sometimes as dilution, because the printed money is distributed unevenly. Even as the number you hold increases, your share of the pie shrinks.

        I was working for a startup that was bought by one of the big tech companies nearly 2 decades ago. All the employees were issued stock options early on, and I was the only one who took detailed notes at the meeting. When we were bought years later, everyone was thrilled about their payday. I went through the 2-inch thick packet of documents for the purchase (technically a reverse merger) and saw the number of shares outstanding had been doubled in the last year. After some discrete probing, I learned that only the ‘inner circle’ had new grants that offset (or more) the share dilutions.

        I think of QE / ‘money printing’ as a similar sort of play by those in power.

  3. “Toll has some advantages. It has carved out a niche as the only large publicly traded luxury builder, its land is typically well located and its customers are less sensitive to higher buying costs, according to Drew Reading, Bloomberg Intelligence analyst.”

    This is why Drew-boy gets paid the big bucks!

    Earlier in the article…

    “The luxury-home builder’s fiscal fourth-quarter results, announced Tuesday, included a decline in orders of 13 percent from a year earlier. The average estimate from analysts was for an increase of 5 percent.

    Toll Brothers is heavily focused in segments and geographies that are cooling — high-end homes and California, specifically. In California, which is facing an affordability crisis and a decline in foreign demand, orders fell 39 percent.”

    Running out of rich all-cash money launders from China???? Also known as the Greater Fools.

    1. Not necessarily, the Chinese would like to make a profit, but when you launder $ you have to pay. So even if they lose 20% they get to keep 80% of their capital. In China if discovered maybe they lose 100% of their capital. So they have maybe lower expectation. Chinese demand here in CA really has seemed to dry up. Last year fairly regularly we would have realtors specializing in Chinese clients banging around the complex trying to get listings.. You don’t get that today.

  4. “we saw the market soften further, which we attribute to…well-publicized reports of a housing slowdown”

    In a world detached from reality, events are merely shaped by reporting.

    1. Mr. Ben’s blog brings down yet another global hou$ing bubble 2.0 … Best knot to me$$ with a “$traight $hooter”

  5. A few data points from the LA suburbs while visiting some friends.

    They live in a nice area. Housing has gone insane there. Average house close to $1 million. They are nice houses but nothing too special (4 bed/2 bath on maybe 1/4 acre).

    Two houses behind them were build on spec. They have not sold in over a year. Owner decided to move into them and live for “tax purposes” until the market turns around.

    New neighbors moved in right and left. Both are firefighters with wife and kids. Lots of toys to include RVs and ATVs. Wives work as schools teachers. News cars and trucks. Nice vacations.

    Public union employees are the new 1%.

    1. In CA this is true. Fire and police routinely make $150k+ with overtime, and a pension. Over $200k is common.

      Knowing what I know now, I would’ve gone this route when I was 20, be retired by 50. Amazing

      1. My next door neighbor is a teacher in a crummy school district here in San Diego, Vista. He was talking about a raise and I’m thinking “fantastic teachers are underpaid” when he told me he was at $85k I was like are you kidding me? My wife is in sales, works 12 months out of the year, no pension, no tenure and makes that! No wonder California is so in debt.

        1. “No wonder California is so in debt.”

          California shoulders roughly 34% of the nation’s welfare caseload many of whom never provided any contribution, and this cohort uses more medical services than the general population.

    1. Lumber prices are coming down? Not at retail stores. Two weeks ago, unspectacular 6′ x 12″ x 1″ pine boards were nearly $17 each.

      1. When you need lumber, go to a lumber yard. When you need mech or elec, go to a supply house….. and pay half the price.

        Paying double for materials that don’t meet spec doesn’t make sense.

    1. Single stocks, I don’t know. But I’ve had good luck with consumer staples funds and contrarian-type funds. Possibly energy.

    2. utilities as interest rates crash next year in a recession. If that happens , but odds are increasing . Probably Bonds also. last time this happened we had a guy pounding the table for 30 year zero coupon treasuries or something like that. I wonder what ever happened to that guy ? 2006 I think or maybe 2007 ? I was in phoenix AZ. Then it all fell apart…

    3. I’ve never understood Costco’s success and I do not believe it is a recession stock. Poor people don’t shop there, I know this because I am one.

      In my area, Pricerite always has cheaper prices on all the staples I need. With no membership fee. Sure they don’t have imported Dutch Edam cheese, but who needs that anyway when 2 lbs of cheddar is $4.50.

      Seriously, why do people pay $100 for the privilege to buy overpriced, oversized products at Costco?

      1. Costco because they sell everything a family NEEDS below cost, which during a recession people buy need vs. want.

        Plus if these tariffs kick in they will be the go-to place for appliances and such – the membership price is well worth the cost of admission.

          1. And some random brand of new fangled pita chips, of which I have 9-month’s worth of now in my pantry. I pass on Costco.

        1. I NEED 42 pickles and a 4 lb sack of beef jerky.

          This never made sense to me. In the SF area there is no difference in price for MOST things I purchase at other stores, especially meat. Plus I can’t store that much crap, plus I have to pay a membership to shop there. The only good thing is the price of gas at their pumps, but the lines are nuts, so the opportunity cost negates any advantage. I stay away for economic reasons, the very reason most people say they’re great. Doesn’t add up for me or anyone else I’ve convinced to stop shopping there.

      2. “With no membership fee”

        Costco makes 75% of its revenue (2.4billion) from member fees. Actually quite a smart business model IMO. Costco stock and divends have been very profitable and even with Amazon, Walmart / Sams club, I doubt they will ever have any worries. They built a good business model and have the consumers to back it.

  6. txchick was shorting banks using a ETF I think fun times.

    No stock will hold up if its a bad correction even the good ones get sold to cover the bad, sell the index fund takes them all down. Absolute freak out especially now that so many have 401k’s and are self managed. loss 500K in a month and its bye bye retirement. Sell at the bottom and its worse.

    I was out of my house and most stocks and it was still scary. Could it happen again ? Why not nothing got fixed.

    1. FAZ is the etf I’m in. It is very frustrating so far, seemingly unable to break $12/share no matter how much the market drops. It seems these financial institutions are well-protected no matter what. Similarly, my gold miners pick JNUG is close to an all-time low, supposedly because the dollar is sooo strong.

    2. I don’t guess it will help matters that many corporations borrowed at rock bottom rates, then used the proceeds to buy back their own stock shares.

      How well does this strategy work when interest rates are rising and share prices are falling?

      1. How well does this strategy work when interest rates are rising and share prices are falling?

        Just peachy for those of us smart enough to short and play the fear trade. Companies are left saddled with debt, less cash, and quickly falling stock prices from all-time highs. VXX and TVIX are fun to trade just off the technical indicators.

  7. The guy from Toll recited recent news and publicity for buyer reticence. And true, that can exacerbate, as it did in,2006, but what created that discussion in,the first place. You will not have such talk without downtrend first. A lame excuse.

    1. Their houses are overpriced big boxes and those who got burned in the first wave have long memories. They got a second wave of suckers from China and young fools from high tech upgrading or too impatient and irrational to really see the poor quality of those houses. It will be very interesting to see what happens to them this round. They bought an even worse quality company during the last down turn – Cam West – who also built way overpriced shacks that were falling apart on new builds before buyers moved in. It was amazing watching the fighting and the tragedy over all the warranties they refused to honor. It’s great fun going to the BBB and reading the complaints and lack of resolution. Never buy into a development from one of these crooks. It is a poor investment and will bit many in the ars as the cycles grind on.

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