Thursday, November 08, 2007

Toll: High Cancellations

by Bill McBride on 11/08/2007 11:22:00 AM

From MarketWatch: Toll's home orders drained by cancellations

Toll Brothers ... said Thursday its net orders for new homes in the latest quarter fell 35% from a year earlier as cancellations increased, pointing to further losses in the residential housing market.

"We continue to believe that excess supply created by cancellations, speculative buyers, and overly ambitious builders; customer concerns about selling their existing homes; and a general lack of confidence are the primary impediments to our market's recovery," said Chief Executive Robert Toll in a statement.

He said tighter lending standards and inability to obtain mortgages as a result of the subprime mess do not appear to be a "major factor" affecting its mostly affluent buyers. However, he said a tougher mortgage market may make it more difficult for buyers to sell their existing houses and move into a Toll house.
...
The builder had 417 cancellations during the quarter, while net contracts totaled 656 homes. Toll said the cancellations were heavily concentrated in high-priced markets and product lines.

"Unfortunately, the pace of customer cancellations increased in this fourth quarter," Rassman said. "We, and other reporting builders, have observed that October's activity appeared weaker than September's. These trends suggest that we still have challenging times ahead, which we believe are reflected in our estimates for fourth quarter impairments."
First, these higher cancellations mean the New Home inventory numbers from the Census Bureau will be too low. See this discussion on how the Census Bureau handles cancellations. Note: Toll is one of the companies I use to calculate the adjusted New Home inventory. I should have an update for Q3 soon.

Second, Toll is probably correct about the minimal direct impact of tighter lending standards on high end homes. However, as Toll noted, if the high end buyers can't sell their homes, they can't buy Toll's homes.