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(Bloomberg) – Wealthy buyers are pulling out of the US's most expensive real estate markets, the latest sign being that exorbitant prices and fears of a recession weigh on a key sector of the economy.
Toll Brothers Inc., the country's largest publicly traded luxury home builder, said on Tuesday night that purchase contracts fell by 3 percent from a year ago, which is worse than falling back less than 1% forecast in a Bloomberg survey of six analysts. The company's orders in California, home to some of the country's most expensive markets, dropped 36 percent from a year ago.
The results highlight an ongoing change in the US housing market. The return to low mortgage rates is intensifying competition for start-ups and fueling strong price increases in cities that have long been more affordable. At the same time, demand has fallen on expensive markets, such as San Jose and Seattle, as well as luxury homes built by Toll.
"Their buyers are a little more sensitive to what's happening across the economy," said Drew Reading, an analyst at Bloomberg Intelligence. "They pay more attention to the stock market."
Signs of slowing down
Wall Street and Washington are jostling this month over the risk of an economic slowdown after US stocks have suffered one of the strongest sales of the year, Aug. 14, and that's one. key portion of the US Treasury yield curve reversed for the first time in 12 years. New home sales were also weaker than expected in June.
Home builders who target homebuyers are better positioned to deal with changing demand, said Reading. Shares of D.R. Horton Inc., specializing in startup homes, soared 41% this year, while Toll Brothers rose 12%. The stock slid 1.9% in pre-market trading on Wednesday.
The main challenge for luxury goods manufacturers is perhaps their concentration in California, where the average price of contracted homes reached $ 1.74 million for the quarter. Chinese buyers have pulled out and the federal tax overhaul has limited property tax deductions and mortgage interest.
As with other homebuilders, Toll's profits have been negated by the need to boost sales with purchase incentives. Fewer businesses in California, with their relatively large margins, did not help either. Toll's full-year forecast of adjusted gross margin of 23% was slightly below the consensus of 23.2%, according to a Bloomberg survey of analysts.
"Tailwinds" Intact
The balance sheet is starting well for the current quarter, which began August 1, said General Manager Doug Yearley in the statement of operations.
"Low mortgage rates, the limited supply of new and existing homes, and a strong job situation are good for downwind," he said.
The company was looking to expand its operations in other parts of the country and build cheaper homes.
"They diversify the type of product they build, but it's not a transformation that happens overnight," said Alex Barron, an analyst at El Paso's Housing Research Center, in Texas. "Toll Brothers, that's luxury. From Nordstrom, they are not going to become Walmart. "
(Updates the actions in the sixth paragraph.)
To contact the reporters on this story: Noah Buhayar in Seattle at [email protected], Prashant Gopal in Boston at [email protected]
To contact the editors in charge of this story: Debarati Roy at [email protected], Josh Friedman, Dan Reichl
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