A look back in time: One of Our Favorites Part 1
Chuck Ponzi November 16th, 2006
Source
Interview with Joel Rassman, Toll Brothers Executive on June 9, 2005 by Marketwatch correspondent John Spence for WSJ.com Real Estate Journal
Q. Is there a housing bubble?
I don’t think so. If we see an adjustment caused by something we don’t envision, it’s likely to be similar to the situation in the San Francisco market caused by a loss in jobs when the dot-com bubble burst. There was a rollback in home prices for a year, but then the market came back even though the jobs didn’t return.
That’s where we are in most parts of the country. Again, there’s a supply and demand imbalance that tempers any unusual activity in the short-term.
Q. Toll Brothers has been growing rapidly. What’s the outlook for the company?
We had a great last quarter — everything fell into place. Our results were terrific, and we have a record backlog. Our visibility leads us to believe we’ll be able to do 70% higher earnings this year above last year, and about 20% next year compared with this year. Last year was 57% higher than the year before, so we’ve seen solid growth, and we expect more.
Q. Is Toll Brothers more resistant to higher interest rates and a weaker job market, since its customers tend to be wealthier and retired?
In general, we have a more affluent buyer base. The average price of a Toll Brothers home is about $650,000.
That translates into protection against interest-rate increases for our customers. But for the industry in general, if interest rates were going up because the economy is improving due to higher employment and wages, it could offset the rate increases.
Also, there’s been a lot of talk about the Federal Reserve slowing rate increases, since inflation appears to be in check. So the concern over rising interest rates may be overplayed.
Anyone else care to make any prognostications if the pros couldn’t get their own business right?
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Love this statement:
In general, we have a more affluent buyer base. The average price of a Toll Brothers home is about $650,000.
This statement doesn’t make any sense. $650k is the median home price in OC. Median doesn’t define affluence. I would consider affluence more like above the 85th percentile or so. In effect he is admitting that there is a bubble since the median home price is targeting affluent buyers.
I think it will be interesting to watch these guys (Toll) change their ‘tune’ with the passage of time..
Anyone else care to make any prognostications if the pros couldn’t get their own business right?
I’m going to predict that at the end of the bubble, this company will be out of business.
$650K can be considered affluent IF you buy a home in the traditional sense and can comfortably afford a $3-4K/month payment.
With ARMs/NEG-AM’s, zero down, etc…yes..that’s not affluent…but it also isn’t owning a home.
The Toll guys knew more than they admitted to knowing. They put out their positive spin at the same time that Mr. Toll was selling large amounts of Toll Brothers stock during the summer or 2005. Looks like his view was less optimistic than the official company line.
$650,000 is the median price for Toll houses countrywide – not for OC. That is an important distinction overlooked by the first comment above. $650k is about three times the national median. Toll is clearly targeting affluent buyers. The more affluent buyers are less sensitive to interest rates since they generally have much larger down payments, trading up with equity. That doesn’t much matter though, since prices will continue to decline with or without interest rate increases (I expect rate decreases).
The decline started more than a year ago. I think we have about two more years to go before we reach bottom, and then the slow recovery will begin.
Toll will be selling fewer houses for a while. But they will not go out of business.