Toll loses steam as climbing home prices deter rich Americans

Sept 3 Wed Sep 3, 2014 1:03pm EDT

Sept 3 (Reuters) - Toll Brothers Inc is finally feeling the pinch as a steep rise in home prices discourages even the most affluent Americans from buying its luxury homes.

The company, whose homes can cost more than $2 million, had so far reported stellar results by selling more homes at higher prices. But analysts said the largest U.S. luxury homebuilder seems to have pushed its prices to the limit.

"Even though Toll targets the high-end luxury buyer, pricing has been pushed so high already that at some point the buyer is going to walk away," Morningstar Inc analyst James Krapfel told Reuters.

Toll reported a 6 percent fall in quarterly orders, compared with a 10 percent rise a year earlier.

Horsham, Pennsylvania-based Toll's shares fell 3.9 percent to $34.23 on Wednesday.

With U.S. household income hardly growing and home prices continuing to rise, housing experts warned that Toll may have to check its price increases to lure back buyers.

Personal income in the United States rose 0.2 percent in July, the weakest reading since December, Commerce Department data showed. Personal spending fell 1 percent.

A slower-than-expected recovery in the U.S. housing market this year has hurt other homebuilders too. No.1 builder D.R. Horton Inc had to offer discounts to boost sales in some markets in its quarter ended June 30.

While Toll said it did not offer incentives in its third quarter ended July 31, analysts said discounts could be around the corner.

"The company will have to ultimately choose whether it wants to target pace over price," Krapfel said.

Toll's average selling price rose 12 percent to $732,000 in the third quarter. Prices had jumped 22 percent in the previous two quarters.

Toll was not immediately available for further comment.

Analysts said Toll's results do not point to wider softness in the U.S. housing market, which has recently shown signs of picking up.

Construction on new homes rebounded strongly in July after two straight months of declines, data showed.

Toll's large land bank and exposure to the apartment rental business make the company better positioned to take advantage of this recovery.

At Tuesday's close of $35.63, Toll's stock traded at 16.2 times its forward 12-months earnings estimate, according to StarMine data. The top five U.S. builders, which include Lennar Corp, PulteGroup Inc, NVR Inc and KB Home, traded at an average of 13.1 times.

"We like Toll's niche positioning as a luxury player in a housing market that appears to be getting more competitive at the lower end of the buyer spectrum," said MKM Partners analyst Megan McGrath. She has a "buy" rating and $43 price target on the stock. (Editing by Sriraj Kalluvila)