Shares of high-end home builder Toll Brothers Inc. TOL -9.56% fell 10% after the company reported lower-than-expected profit margins for the three months ended April 30.
There has been concern among investors that a rise in mortgage rates since January could be a deterrent to the home-building industry. Average rates for 30-year fixed mortgages last week rose to a seven-year high of 4.61%, according to mortgage giant Freddie Mac .
But Toll Brothers executives said on a conference call with Wall Street analysts Tuesday that the rise in rates hasn’t affected its business so far, citing strong sales in lower-cost markets such as Boise, Idaho, where buyers might be more sensitive than higher-end customers to fluctuations in interest rates. The company focuses largely on high-end homes with average price tags double those of other large builders, and executives said those buyers are less susceptible to fluctuations in mortgage rates.
“Our clients have much higher credit ratings. They put more money down,” said Chief Executive Doug Yearley. “It’s generally easier for them to get a mortgage because they’re not tapped out when rates go up a little bit.”
Adjusted gross profit margin for Toll Brothers was 22.5% for the second quarter ended in April, below the company’s previous guidance and down from 24.3% in the same quarter last year. The company said profit margins for the quarter were down because of some specific operational issues: delays on some particularly profitable homes in California, and a push to sell condominium inventory in New York City to generate cash for other priorities.
Shares in Toll Brothers closed at $39.46 on Tuesday.
The company has also been affected by higher costs for labor and materials, particularly lumber, which has risen to record highs in 2018 after the Trump administration’s decision last year to place tariffs on Canadian lumber.
Jack Micenko, a home-building analyst with Susquehanna Financial Group, said the disappointing gross profit margin could mostly be attributed to one-time operational issues for the quarter. But he said the timing wasn’t great, because of investors’ concerns about how interest rates could affect the housing market more broadly.
“Most investors right now are hypersensitive to rising rates and the potential impact on demand,” he said. “This is a tough quarter to have some operational issues.”
Overall, Mr. Micenko said he is still seeing strong home-buying demand, based on discussions with other builders and in surveys of buyers. Demand is related more to broader trends in the economy, rising equity in one’s current home, or life events such as a new marriage or the birth of a child, he said.
“I think there’s very few people who buy a house solely based on where mortgage rates are,” he said.
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