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High-End Homes: Is the Tide Turning?

High-end homes appear to be selling better than analysts thought.

Toll Brothers (TOL), the nation's largest luxury homebuilder, on Aug. 12 announced its first year-over-year increase in signed home contracts since 2005, suggesting that first-time buyers might not be alone in driving improving U.S. home sales.

The Horsham (Pa.)-based builder said that signed contracts in the quarter ended July 31—though still low by historic standards—rose 3%, to 837, compared with the same period a year ago. But revenues fell 42% in the quarter, to $461.3 million. The company also said it has been able to reduce buyer incentives in several markets as demand and contract cancellations improve.

"Mood Has Changed" No other major builder has matched Toll Brothers' 3% increase in contracts signed, though a few reported a 2% improvement in the most recent quarter, said Barclays Capital analyst Megan McGrath in New York. The average quarterly decline in new home contracts for major public builders was about 14%, she said.

Toll Brothers attributed the improvement to low interest rates, government home-buyer incentives, the recent stock market surge, and decreased competition from smaller and midsize builders now frozen out of credit markets. "The mood has changed," Chief Executive Robert Toll told analysts during a conference call. "Our traffic still stinks…but those people that are coming in are more serious. They're not just fishing any longer. Now, there's fear on both sides. We fear not selling and they fear missing."

McGrath said Toll Brothers is selling homes for an average of $582,000—far below the multimillion-dollar price tags for the estates of the rich and famous commonly referred to as "luxury real estate." The market for million-dollar homes is weak, but Toll Brothers' homes are more modestly priced and generally don't require "jumbo" mortgages. Those are loans that generally exceed $417,000. Toll said the company's strongest markets are in the Northeast, particularly Connecticut, the New York suburbs, and New Jersey. But sales are also strong in the Virginia suburbs of Washington, D.C.; Delaware; Raleigh, N.C.; Orlando; Northern California; and Naples, Fla.

Too Soon to Tell Shares of Toll Brothers closed 14% higher Wednesday, at 23.42. "There are a lot of stories in the press about how…poor the luxury market has been doing," McGrath said. "Some of it is a misunderstanding about what is luxury and Toll's actual business."

Michael Widner, vice-president of Stifel Nicolaus Research (SF), said it's too early to say whether Toll Brothers' performance represents a change in the market because the small improvement in contracts signed might be a temporary blip. "If we have seen a rebound in something other than the first-time home-buyer market, this is the first real sign of it," Widner said. "It's a little early to celebrate too much."
Gopal is a reporter for Bloomberg News in Boston.

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