Builder Handicaps Housing Market Turnaround
The last time Fortune checked in with Bob Toll, founder and CEO of luxury-home builder Toll Brothers, was in April 2005, when the magazine dubbed him the “new king of the real estate boom.”
The moniker seemed apt.
Toll Brothers was reaping record profits, and the company’s stock chart looked like Cisco’s in the late 1990s, with shares soaring 470 percent in less than three years.
Needless to say, much has changed since then.
The home building industry is mired in a slump - sales of single-family homes dropped 16 percent in May, hitting their lowest levels since 2001, and the stock prices most home builders have been halved.
Fortune took the time to speak with CEO Toll about the current state of the housing market and when we can expect mortgage loan applicants to return en masse.
How bad is it out there?
I don’t see the market getting better until, at the earliest, April of 2008. But I do think that when a recovery occurs, it will be much quicker than it has in the past because of pent-up demand. You’ve got decent job growth, low unemployment, low mortgage rates, great corporate earnings reports and tons of money being created around the world.
Weren’t you worried about speculation in the California and Florida housing market and elsewhere during the boom?
There wasn’t anything we could do about it. We would make people sign in triplicate swearing up and down that they weren’t speculators, but we couldn’t control whom the builder next door was selling to. When the market goes south, even slightly, the investor-speculator says, “It’s time to cash these things in.”
Some analysts think new-home prices would have fallen even further if not for all the incentives that builders are offering.
When you start selling homes for $400,000 that were $500,000, homeowners who paid $500,000 are going to be in your office complaining, “Why are you doing this to me? Why don’t you just put a sign on my lawn saying, ‘I’m a schmuck?’” So you’ve got to give incentives instead of lowering home prices because you don’t want to be seen as rude, crude and barbaric to your clients.
There’s been a lot of speculation that with builder stocks down so much, they might be takeover targets for private-equity funds. Are they?
I think every builder has been approached and had conversations, but obviously they haven’t gone anywhere. Say an LBO fund approaches a home builder, saying, “Look, your stock was $50, it’s now $25. I’ll give you $30.” Well, why should I sell for $30 when every time the housing market has come back we’ve gone to new highs? I’m better off just battling through this and making it back the old-fashioned way. By earning it.
SOURCE: CNN Money