Why a Luxury Home Builder Refused to ‘Chase Buyers’ This Summer
- Homebuilders offered more incentives to boost sales during the market downturn.
- But luxury carmaker Toll Brothers said it was withholding any meaningful incentive.
- Buyers were sidelined and not even looking to negotiate, CEO Doug Yearley said.
When buyers began exiting the housing market this summer, one of America’s largest homebuilders resisted the temptation to offer big incentives to increase sales.
Indeed, many buyers had simply exited the market as mortgage rates rose, executives at luxury homebuilder Toll Brothers told investors this week. For most of the company’s third quarter, which ended July 31, Toll Brothers “deliberately did not pursue buyers with incentives,” the company’s CEO, Doug Yearley, said during the press briefing. the company’s quarterly earnings call on Wednesday.
Homebuyers would need affirmations that Toll couldn’t offer, Yearley said. Rising home prices, doubling mortgage rates and high inflation eating away at budgets proved too much for many buyers.
“We knew they were headed for the sidelines,” Yearley said. “They were going to take the summer.”
Yearley added that buyers were starting to emerge, although falling demand and supply chain disruptions persisted. Because of those difficulties, Yearley said the company expects to complete about 1,000 fewer homes this year than it expected at the end of last quarter, or about 10,000 to 10,300 units in total.
As buyers began to return to the negotiating table later this summer, Toll Brothers “modestly” sweetened the deals by increasing average discounts from around $12,000 in May to $15,000 in June, $22,000 in July and $30,000 in August, Yearley said. But those numbers are a fraction of the cost of the company’s homes, which typically sell for around $1 million.
Raising incentives is a common tactic for homebuilders to counter higher mortgage rates that have put homebuyers on the fence. DR Horton, the nation’s largest homebuilder, is offering more incentives after 24% of its contracts failed in the last quarter, the company announced in July. Builders, much more than existing owners looking to sell, have borne the brunt of the housing slowdown.
In July, sales of new single-family homes fell to an annualized rate of 511,000 units, from 588,000 the previous month, the Census Bureau reported Tuesday. Economists polled by Bloomberg had expected a more modest slowdown, to 575,000 units. Instead, the pace of new home sales hit the lowest rate since January 2016.
In the first three weeks of August, Toll Brothers saw the volume of non-binding deposits it receives in an average week jump 25% from July, while digital leads and foot traffic in its model homes have gone up, Yearley said.
“We are cautiously optimistic that the housing market is settling into a more normal seasonal cadence,” Yearley said.
While Toll Brothers reported record revenue and profits in the last quarter, the company’s net contracts signed for the quarter were down 60% from the same period last year when demand was much higher. strong. Shares of the company were trading at around $46.50 per share Friday morning, up about 2.2% from Tuesday, when it reported quarterly results.