Wednesday, August 25, 2010

New Home Sales Plunge Again To Record Lows

New home sales drop in July to lowest levels on record. Even with that grim news, Toll Brothers made money in the quarter (and profits for the first time in three years).

So, how did Toll Brothers do it?

Well, for starters, they did it by cutting costs and managing its portfolio (eeking out a profit on 1.6% less revenue) - but the MSNBC news report claims that the key was the homeowner tax credit which expired in April (then June). No doubt that their results would have been far worse for the reporting period if the credit wasn't there, but we'll now see just how badly they get hammered in upcoming months.

By stealing sales from future months, the expired credit means the homebuilders will be right back in the mess as the housing numbers are downright putrid if you're a seller and buyers are staying on the sidelines hoping prices continue down and become more affordable.

Toll Brothers managed to build a profit based on trimming expenses. This wasn't organic growth; it was merely limiting expenses. That will benefit the company once the real estate market turns around and in the long run because it will have shed unnecessary expenses and streamlined its business, but the turnaround may not have anytime soon.

The expired credits simply goosed sales that would have occurred in any event from one quarter to the other. Now, those sales are gone and the ongoing bad real estate conditions will only appear far worse than if no credit had been available.

Some folks are speculating that the homebuilder stocks are rallying because we might have hit bottom and there's only one place for them to go - up. That's far too optimistic given current market conditions and the way that the absurdly low interest rates are not driving increased business for mortgages and refinancing.

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