Toll Bros posts surprise loss; shares sink

(Reuters) - Luxury homebuilder Toll Brothers Inc (TOL.N) reported a surprise quarterly loss as more buyers cancelled contracts, stunning investors who had piled into housing stocks in recent months in hopes a recovery was imminent.

Shares of Toll were down more than 5 percent in afternoon trading. Other homebuilders also fell sharply on the news.

It was an unexpected development for Toll, whose stock, along with the rest of the sector, had nearly doubled since October on expectations that ultra-low interest rates and record-low prices would push more consumers to trade up to the lavish, roomy homes that the company builds, which average about a half a million dollars a piece.

But that hoped-for surge in homebuying has yet to materialize. Analysts say Toll's results prove it is not imminent either, with continuing consumer fear about high unemployment, rising gasoline prices and the strength of the overall U.S. economy.

"The whole group of homebuilding stocks was priced as if there were a return to normal that was going to happen by the end of this year," said Michael Widner, an analyst at Stifel Nicolaus, who has a "sell" rating on Toll's stock. "It's not going to happen."

Between a bottom on October 3 and Tuesday's close, Toll shares had risen 72 percent, while the broader sector was up nearly 67 percent. Over the same period the S&P 500 managed gains of around 24 percent.

Homebuilders' shares normally appreciate at this time of year in anticipation of the spring homebuying season, which is the equivalent of Christmas for the sector. But the housing market remains mired in its worst slump since the Great Depression.

Even though it is now cheaper to own than to rent, with interest rates at record lows and inventories at record highs, most consumers are still shut out of the market altogether.

Nearly half of homeowners who have mortgages are either in foreclosure, delinquent on their mortgage payments, owe more on their mortgage than their house is worth or have less than twenty percent equity in their home.

That's not to mention the difficulties faced by first-time homebuyers, who are contending with record-levels of student debt at the same time as they are trying to raise down payments and meet lenders' ultra-strict new guidelines to qualify for mortgages.

STARTING TO BE OPTIMISTIC?

Against that backdrop, Toll said its contract cancellation rate for its fiscal first quarter ended January 31 was about 6.2 percent, compared with 5.7 percent a year earlier.

Yet in a statement, Executive Chairman Robert Toll pointed to the recent rise in housing starts as a continued cause for optimism. "Since the new home industry is coming off several years of historic low levels of production, we are encouraged by the recent improvement," he said in a statement.

A U.S. Commerce Department report last week said housing starts rose 1.5 percent to an annual rate of 699,000 units in January, beating economists' expectations for a 675,000-unit pace.

But the rise in starts - a key indicator of the strength of the housing market - mostly stems from construction of apartment buildings, which are drawing families who have been foreclosed on, as well as those who can only afford to rent.

Toll Brothers reported a net loss of $2.8 million, or 2 cents a share, compared with a year-earlier profit of $3.4 million, or 2 cents a share.

Analysts on average were expecting earnings of 2 cents a share, according to Thomson Reuters I/B/E/S.

Horsham, Pennsylvania-based Toll's revenue for the quarter fell 4 percent to $322 million, below Wall Street expectations of $360.8 million, while home building deliveries fell 1 percent to 564 units.

Toll shares were down 5.5 percent to $22.40 in early afternoon trading. The Dow Jones home construction index .DJUSHB was down 2.6 percent, with all seven index components lower.

(Reporting by Michelle Conlin)