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Should have seen this coming...

Posted by: Dean Foust on November 9, 2005

In case you missed it yesterday, Toll Brothers—a big builder of luxury homes in the Northeast region—warned that there may be a softening of demand for housing. That was enough to knock 12% off its stock (and depress the stocks of other home builders), as Wall Street feared that this was Toll’s diplomatic way of saying tough times lay ahead. My BW colleague Peter Coy has a good analysis of Toll Brothers’ news, which you may have seen on the front page of BW’s web site.

I don’t know why Wall Street was shocked by this news. A good early indicator for these kinds of warnings is to look at the “insider sales” of stock by corporate executives. We saw this back in the late 1990s when tech executives began dumping stock by the truckload in 1999 and 2000, just ahead of the tech slump. And a few months ago, the top executives of major builders were also dumping shares of their holdings of their company’s stock, as noted at the time in this article on MSN Money. As the MSN article noted, the Toll Brothers themselves—and yes, the company is run by the brothers Toll—were among the heavy sellers:

Meantime, Bruce and Robert Toll, directors at Toll Bros., have sold at least $70 million worth of their company’s stock since June 12. Toll Bros. shares declined to $26 from the $30-$32 range in mid-June, where insider selling was heavy. Recently the shares recovered to around $30.

If you look at insider selling at Toll Brothers over the course of this year, you’ll see a lot more selling than buying. Granted, the Toll brothers’ timing may not have been perfect—the stock kept rising after their sales—but they were clearly signaling that they didn’t think the housing boom had much longer to run. Same story with other builders. Why don’t investors ever see this coming?

Reader Comments


November 9, 2005 12:02 PM

Dean, I think you answered your own question.

People are caught up in the hype of the real estate market. The news from Toll Brothers, in and of itself is insignificant. A builder sees softer demand. SO WHAT? It might be solely related to difficulty getting building permits.

The real story here is hidden between the lines. If you read the comments in this blog for all the articles anyone with a pulse should be able to discern there is a serious change underway in the housing market. What this change entails is unknown to even Papa Greenspan himself.

I believe the Toll Brothers warning is tantamount to Paul Revere's lantern in the steeple. If people were unsure about a bubble or just plain in denial, yesterday was a shot across the bow. Everyone should at least be concerned about the fallout of the market. It might be a slow drop, might be a long term lull, or it might be the largest asset crash in history.

The fact is a monumental change in the housing market is sweeping in from all flanks (interest rates, affordability %, exotic financing). Will it defeat us or will it only postpone the day of reckoning?

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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