Toll Says Home Buyers Tiptoe Back

By DAWN WOTAPKA and JAMES R. HAGERTY Lower prices, mortgage-rate discounts and other incentives for home buyers yielded much-stronger-than-expected orders for Toll Brothers Inc. in its most recent quarter. "Fence-sitters are looking for reasons to jump in on the side of buying," said the upscale-home builder's chief executive, Robert Toll. He added that "price is no longer the overwhelmingly dominant factor." A rebound in the stock market and "a better feeling" about the economy and job prospects have helped, Mr. Toll added. "The mood has changed." View Full Image Bloomberg News Toll Brothers recently offered weekend specials to lure buyers. Above, a house under construction at a Toll development in Coppell, Texas. Investors saw the company's preliminary results for the quarter ended July 31 as a sign of improving confidence among potential home buyers, many of whom until recently have been scared away by expectations of further price declines. Toll shares surged 14%, or $2.94, to $23.42 at 4 p.m. Wednesday in composite trading on the New York Stock Exchange. Toll's net orders -- contracts signed minus cancellations -- rose 3% from a year earlier to 837, the first gain since 2005. In dollar terms, those orders were down 5% to $447.7 million. D.R. Horton Inc., the nation's largest builder by annual closings, also has noted an upturn. Last week, D.R. Horton said sales in the company's third quarter ended June 30 rose 22% from the prior quarter. Ken Campbell, CEO of California-based home builder Standard Pacific Corp., said the market has stabilized. "To me, it seems like we may have found a bottom and signs are pretty good," said Mr. Campbell, whose company does most of its business in California and Florida. While the latest results hint that the battered home industry might be improving as consumers gain confidence, numerous hurdles remain. They include high unemployment, tight credit standards and competition from banks' sales of foreclosed homes. "We still need a lot more improvement before you see home builders delivering significant profits," Mr. Campbell said. Bloomberg News Indeed, buyers aren't flocking to Toll. "Our traffic still stinks," Mr. Toll said. But those who show up are more serious about buying rather than just asking for ever-deeper discounts, he said. Among markets that have shown improvement recently, he said, are the New York suburbs, the west coast of Florida from Naples to Tampa, Orlando, Northern California, Virginia and Washington, D.C. Toll is cautious about encouraging customers to select upgrades to houses that sharply raise the price, Mr. Toll said, because of the risk that appraisers, who have become more conservative, may cause lenders to question transactions at prices that appear high in relation to other recent sales. Toll, based in Horsham, Pa., recently has offered weekend specials such as discounted upgrades on countertops or cabinets, as well as mortgage rates below 4%. Home builders typically pay mortgage investors cash upfront in exchange for the low-interest loans. The company's Web site touts "amazing incentives" and "special limited-time offers." But Toll said improving demand recently has allowed the company to reduce incentives in many markets, primarily in the Northeast and mid-Atlantic states. "The sequential improvement [from the prior quarter] is clearly there," said Kenneth Leon, an analyst with Standard & Poor's Equity Research. "Sales are not expected to come roaring back, but it looks like the luxury market is beginning to stabilize." In the overall housing market, sales at the low end have been much stronger recently than those at the upper end. That is partly because mortgage rates are higher for jumbo loans, those too large to be guaranteed by government-backed investors Fannie Mae and Freddie Mac. In the country's most-expensive property markets, Fannie and Freddie can guarantee loans of as much as $729,750. But Toll has kept its prices low enough so that 73% of buyers were able to use loans backed by Fannie, Freddie, the Federal Housing Administration or other government entities in the latest quarter, a Toll spokeswoman said. About 17% paid cash for their houses, and only 10% needed jumbo loans. The average price for net purchase contracts signed in the latest quarter was $535,000, down 7.6% from a year earlier. Those prices don't include the value of subsidized mortgages or some advertised options such as an added room, so the true price drop probably is more than 7.6%. Toll said its orders in its third fiscal quarter normally are lower than those in the second quarter, which coincides with the spring buying rush, but this year orders in the third quarter were up 44% from the prior quarter. A rise in the third quarter from the second quarter has occurred only three other times since fiscal 1986, Toll said. Fewer buyers got cold feet. Toll's cancellation rate in the quarter was 8.5%, down from 19% a year earlier and the lowest since 8.5% in the fiscal second quarter of 2006. "Buyers are more conservative and careful" than they were during the housing boom, said Doug Yearley, a regional president for Toll. But many "still want the big house with all the upgrades," he said. Toll's revenue fell 42% to $461.3 million from $796.7 million a year earlier. Earnings and other data for the quarter are due to be released Aug. 27. Write to Dawn Wotapka at dawn.wotapka@dowjones.com and James R. Hagerty at bob.hagerty@wsj.com