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Saturday, August 15, 2009

Bob Toll on housing

A great post on Jeff Mathews blog on Bob Toll and the state of the housing market.

***System Administrator Warning***

The Following Column Contains Positive Statements about

the Economy in General
and the Housing Market in Particular…
Cranky Individuals Who Think America Hasn’t Suffered Enough to Justify a Recovery
Should Avoid Sharp Objects While Reading.

***System Administrator Warning***



That’s right: this is going to be another positive piece about housing.

Only this time we've included a warning, because the last couple of times we highlighted a positive data point on the housing markets we got bombarded with virtual scoffing, snorting and downright hostility from some readers—particularly those who weren’t around when we were writing about the housing bubble back in 2005 (see in particular “The Last, Best Hope For Prosperity,” from June of that year)—who perceived us to be wearing a Pollyanna-ish set of rose-colored glasses.

Still, we here at NMTU are data-driven, not consensus-driven, and the consensus seems to be that while maybe this housing thing seems like it’s stabilizing, we still haven’t seen “The Bottom.”

After all, goes the Roubini-led thinking, how can it be a bottom with all the foreclosures yet to come, plus the unemployment rate still going up, not to mention the budget deficit that will keep us forever in hock to the Chinese and that rigged American Idol contest?

Well, it can be a bottom because—looking at the demand side of the equation for starters—it’s now cheaper to buy than rent for first-time home buyers, and
because housing prices, which peaked at close to 4-times median family income during the glory days are now down to a bit under 3-times income.

That's a level not seen since the early 1980s.

Looking at the supply side of the equation, it can be a bottom because we’re only building new houses at an annual rate of a little over half a million units, compared to an average rate of about a million and a half annual units from 1991 to 2007.

The result, a non-interested observer might conclude, is the potential for some sort of housing rebound, if only consumer confidence might be restored.

And listening to the Toll Brothers call yesterday, we’d say the confidence-restoration process is fully underway, for home buyers if not for Wall Street’s Finest—those analysts so burned by the housing collapse that they refuse to acknowledge clear signs of a housing recovery.

Toll Brothers, as anybody watching the tape yesterday knows, came out with what The Market considered surprisingly good numbers in its preliminary third quarter press release: orders up 3% versus an expected decline of 20% by Wall Street’s Negative Finest; and a net loss of 77c a share instead of the $2.50 or so loss foreseen by WSNF.

Most important, in our view, was that on a per-community basis—the homebuilders’ equivalent to the retailers’ “same-store-sales” numbers—Toll’s orders jumped 32% year over year.

That kind of increase is very good for everything: sales, margins, and future profits. It also heralds good things to come from other American businesses that have similarly slimmed down to meet reduced expectations.

But you wouldn’t know it, based on yesterday’s call.

Wall Street’s Negative Finest, clearly shell-shocked by the sharp improvement in business for a company whose key product—McMansions—was viewed as a dinosaur in a dying industry, seemed not to want to hear about it.

Here’s how one analyst framed the question, courtesty of the indispensible Street Events:

I was hoping you can comment a little bit about the high end market in general. I think there has been a lot of -- a lot written out there that the entry level is performing pretty well given the tax credits that are out there and some other stimulus and the perception is that the high end has been performing much weaker and your order results this quarter seem to refute that.

So I am curious if you attribute it more to share gains either from private builders that simply can't afford to compete or from publics that have, seemed to have kind of exited the high end market in general and made an exodus towards entry level. Or if you think this is more a sign of a stabilization in the high end.

Bob Toll, the CEO of the eponymous company and about as straight-shooting a CEO as they come—in lush times as well as non-lush times—said simply, “I think it is the latter.”

Then he elaborated:

[The] stock market has been going up. Most of the upscale luxury home is impacted one way or the other with the stock market. There's a better feeling about jobs, better feeling about the economy. Six months ago…maybe it goes all the way back to a year ago. Yes, it was [when] Lehman crashed… we were all scared...that the end was near….

And I think that fear has gone away from the public, which has taken the -- taken the public for the luxury market, especially, from coming back six to -- six to nine times continually asking the same question, do you have any additional incentives, do you have any additional incentives, would you accept an offer of 425 for a home that we wanted to get 650 for. I think the mood has changed and we are making our sales instead of six to nine, probably three to six visits.


Straight-talker that he is, Toll bluntly added, “Our traffic still stinks compared even to those lousy days of '89, '90, '91, but those people that are coming in are more serious.”

As you’d expect, Wall Street’s Negative Finest latched onto the “traffic stinks” comment, and asked for clarification, which Doug Yearley, a Regional President, provided:

Traffic has not increased in numbers. The quality has increased significantly. The people are not coming in looking for a public restroom asking the name of the decorator, asking the name of the deck builder, they're coming in -- they're coming in asking good questions that show us that they're seriously interested in buying.

This prompted one of Wall Street’s Not-so-Negative Finest, who’s been recommending Toll stock of late, to ask the unknowable:

First question, Bob, is about what really makes you comfortable that this isn't just kind of hanging out on the ledge for a while and that we don't have another leg down versus it seems like you think this is probably close to bottom and things are getting better and that leaves you comfortable in opening new communities and putting some more money to work in the housing market. I mean, how do you know this isn't just a blip on the radar at this point?

To this, Mr. Toll reasonably responded, “We don’t,” and expanded on this, about as frankly as possible:

We are as scared of a 'W' recovery as the next man. However, the number of weeks of improvement that we have had, as I said in the monologue, are certainly more than anecdotal. You are talking about a whole lot of communities in 40, 50 markets in 20, 22 states. So we are getting – we’re getting pretty deep information and we are going to react not on the basis of a month or two, but we have got about a quarter and a half.

All of which is why we offered our apologies to Alice Cooper right at the top, for as we listened to the Toll Brothers conference call—in which undeniably good facts were being regarded with suspicion, fear and some denial even by those reporting the undeniably good facts—a song lurking in the dark recesses of our brain came to mind.

The song, “Long Way to Go”, is an old Alice Cooper semi-hit (look him up, kids).
And by “old” we mean nearly forty years old.

Why we can still conjure up the melody of a really terrible song—not to mention half the stupid lyrics—from forty years ago, is beyond comprehension, although it did bring back one good memory. (That memory,The Time Jed Drake and I Stole Alice Cooper’s Mailbox, is, however, a story for a different column.)

In the meantime, with even the CEOs still scared—not to mention Wall Street’s Negative Finest—of another dreaded collapse in housing, we here at NMTU think the housing market still has a long way to go.



Jeff Matthews
I Am Not Making This Up