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November 8, 2005

Largest Maker of Luxury Homes Cuts Forecast

By VIKAS BAJAJ and DAVID LEONHARDT

The nation's largest maker of luxury homes said today that the era of soaring home prices might have ended and that price growth could be reverting to more historical patterns.

Appearing to confirm the idea that the booming housing market may be cooling, Toll Brothers reduced its sales forecast for the coming year and said customers rattled by the hurricanes and soaring gas prices were "taking longer to make their purchase decision."

The company's comments, which came as Toll Brothers reported record profits for its current fiscal year, sparked a sharp drop in the price of home-building stocks today. At midday, Toll Brothers' shares were down 12 percent, to $34.66. The Bloomberg U.S. Home Builders Index, which comprises 22 companies, was down 5.9 percent, to 348.82 points.

National home inventories have grown in recent months - in September, there was a 4.7-month supply of existing homes, up from 4.2 months a year ago, and a 4.9-month supply of new homes , up from 4.1 month a year ago.

Toll Brothers reduced its forecast for the number of homes it would sell in its fiscal year, which started on Nov. 1, by 4 percent to 7 percent. Even with the lower forecast, it expects to sell more homes than in 2005, when it delivered 8,769 homes. The lower forecast came even as the company, which is based in Horsham, Pa., posted record profits for its 2005 year.

"All of a sudden, the ads in the paper show special mortgage deals, special incentives," Robert I. Toll, the company's chief executive, said in an interview last week, referring to new housing developments. "That's an absolute indicator that the market has softened."

Mr. Toll said that he believed the market began to soften in early September after Hurricane Katrina seemed to damage the confidence of consumers. The number of investors buying condominiums and houses in the hope of turning a quick profit also seems to have plunged, he added. "The true speculator is gone from the market," Mr. Toll said.

Mr. Toll attributed his company's new forecast partly to toughening local regulations on new home building, saying the rules are lengthening the time it takes for the company to sell homes in its developments.

Prices in hot markets like San Diego, New York, Las Vegas and San Francisco continue to rise year over year in most cases, but there are other indications that the frenzied markets of the past few years have cooled off. The number of homes available for sale is rising in markets like Boston and New York, and the time it takes to sell homes has lengthened. Some agents are talking about a slowdown in attendance at open houses, and some owners have cut prices to attract buyers.

To some economists, the recent softening could turn into the bursting of the real-estate bubble. In some cities, like Boston, Los Angeles, New York and San Francisco, prices have doubled in just the last five years. Rents have not increased nearly so fast, which these economists say is a sign that Americans have become irrational about home values and that prices are headed for a fall.

Even many analysts who are not so pessimistic say the recent increases - often more than 10 percent a year - cannot continue.

"Some kind of adjustment has to happen," said Gene Huang, chief economist of FedEx. "Home prices have been growing so fast for so long, outstripping income growth for many years."

Over the long term, Mr. Huang added, house prices simply do not rise much more quickly than incomes.

But, he added, "It does not have to be a collapse. One way for it to happen would be for house-price growth to be less than income growth."

Per capita disposable income grew 3.6 percent over the last year, according to the Commerce Department.

Toll Brothers is forecasting a slowdown in price increases, rather than an outright fall or even increases that trail inflation. "I think it will be a soft landing," Mr. Toll said.

Home prices typically drop later in the year, when sales slow down from the frenzied spring and summer months. But this year, the drop appears to have been greater. In September, for instance, data from the National Association of Realtors show median sales prices dropped 3.6 percent from August, to $212,000, while they dropped 1.6 percent, to $187,000, in the comparable period in 2004.

Median sales prices for new homes fell 5.7 percent, to $215,700, from August to September. That compares to a 3 percent drop, to $211,600, in the same period in 2004.

Richard A. Smith, chairman and chief executive of Cendant's real estate business, said he too expects a slowing in the housing market next year, but said that 2006 will still be one of the strongest years for home sales.

"The problem with forecasting this time of the year is, if you look at the seasonality of the business, this is always the slowest time of the year," he said in an interview last week. "So, you are looking at the year at a time when the industry is slowing anyway."

The slowdown appears to be linked to a steady rise in mortgage interest rates in recent months. A weekly Freddie Mac survey shows that the 30-year fixed mortgage averaged 6.31 percent last week, up from 6.15 percent the week before and 5.77 at the start of the year. And the Mortgage Bankers Association said loan applications fell 4.8 percent in the last week of October and were 15.2 percent lower than the same week last year.

Motoko Rich contributed reporting for this article.