As Toll Brothers' profits continue to slide, the company's CEO Robert I. Toll says the luxury home builder will get back on track, reducing home production by building to order. So far, the build-to-order plan has seen year-to-year losses of $109 million in the first quarter, $138 million in the second quarter, and $148 million in the third quarter.
Toll's comments came during the company's third quarter earnings teleconference on Wednesday. The Pennsylvania builder, ranked No. 14 in the 2006 BUILDER 100, is reporting $26.5 million in profit, compared to $174.6 million in the same period last year.
"We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets," Toll said. "So far, nearly two years into the current housing slowdown, we have continued to remain profitable and increase stockholders' equity. We believe our build-to-order operating model has helped."
"We believe that reducing new home production until the current oversupply is absorbed is a key step in bringing housing markets back into equilibrium," he added. "Last week's very low housing starts data implied that this is beginning to occur. Once equilibrium is achieved, we believe home prices will firm and customers, who are waiting on the sidelines, will have the confidence to enter the market."
Toll identified some markets in New Jersey as strong and Seattle as an ideal place to try to enter, under the right conditions. The Las Vegas market, however, is presenting the builder with sales challenges.
"We're out there with other builders in Las Vegas, praying," Toll quipped.
During the third quarter, mortgage lending restrictions were not much of an issue for the company, according to Toll. He pointed out that the average Toll Brothers' customer has a FICO score of 745. But he does anticipate mortgage issues trickling down to his customer base in the coming quarters.
"Tightening credit standards will likely shrink the pool of potential home buyers," he said. "Mortgage market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes. However, we believe that our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles."
When asked how he would solve the current problems within the housing industry, Toll said he would first address the lending issues and suggested government intervention.
"A little regulation wouldn't be a bad thing," he said.
Learn more about markets featured in this article: Las Vegas, NV.