Luxury Builder Shrugs Off Lumber Surge With $875,500 Homes

(Bloomberg) -- Luxury-home builder Toll Brothers Inc. is riding the U.S. housing frenzy to record heights. Forget worries about soaring lumber costs. Price increases are covering them, and then some.

After a quarter in which it beat its own forecasts on every metric, Toll boosted its guidance and projected profit margins that will expand this year and improve further in 2022. The shares rose as much as 5.3% Wednesday. The stock has gained almost 50% this year.

The higher profit forecasts come despite labor, land and materials costs that are escalating ever higher, challenging builders across the country at a time when demand for their homes has never been greater. To compensate, Toll and some competitors are pushing prices as far as they can go, testing what buyers are willing to pay.

It’s a strategy that’s working so far, said Alex Barron, a homebuilding analyst with the Housing Research Center. He expects builder earnings, including Toll’s, to about double this year.

“Wall Street feared that the lumber cost increases would squeeze the margins,” Barron said. “In fact what has happened is that builders have raised prices more than the increases such that their margins are expanding significantly.”

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Toll is well-positioned to take advantage of the pandemic-fueled rush to lower-cost states including Texas, North Carolina, Florida and Idaho. Almost half of the company’s sales in such areas are to wealthy buyers from the Northeast or California.

For them, the values are still bargains relative to prices back home. So they’re not complaining about the new strategy by Toll, and other builders, to maximize prices, according to Chief Executive Officer Doug Yearley.

For the three months through April, the company’s average contract price was $875,500, up 6.3% from a year earlier.

Toll is following the lead of the resale market. Rather than keep people tied up on waiting lists, never knowing if or when they can buy a home, it’s moving to the blind-auction model -- giving buyers a short time to put in a bid and then selecting the highest ones, Yearley said on the company’s earnings call Wednesday.

About half the time, Toll is still taking a first-come, first-served approach to waiting lists, but that wait can be costly for buyers. Yearley said his company is regularly boosting prices, which can sometimes jump $50,000 in a couple weeks. And it is metering out lots for sale in each community, a few at a time.

“I look forward to the days when we are able to sell to everybody who wants one of our beautiful homes, but that is not today’s market,” Yearley said on the call.

The company said its gross profit margin will jump to 24.6% for its fiscal year ending in October, up 30 basis points from its earlier forecast a few months ago. Next year, Toll said it expects margins that will “significantly exceed” that level.

The risk is that one day, builders may push prices too high and buyers will pull back. That could start a downward cycle, said Barron of the Housing Research Center.

For now, he says he’s bullish.

©2021 Bloomberg L.P.