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Home Sales Stay on Course
While the market takes a step back, the feel-good story of the season continues to march along. Housing that is. Earnings from Toll Brothers (TOL) set the tone, followed by a decent report on existing home sales. That had the Dow Jones US Home Construction Index up more than 3% Tuesday.
Starting with existing home sales, they were up 2.3% month to month in July to an annual rate of 4.47 million; that was slightly below the 4.50 million consensus estimate. Gains were seen in all four major regions. While still not as high as May levels (4.62 million), it represents a positive reversal after a pullback in June. The National Association of Realtors continues to cite shrinking inventories as a deterrent to stronger sales growth, along with the usual tight credit.
Looking at Toll Brothers' numbers, its fiscal third quarter was a big success. Revenue was up 41% year over year, along with a 57% increase in new orders and a 44% increase in backlog. That also came with an increased gross margin, to 19.2% from 13.8% year over year, and from 18.4% quarter to quarter. It was more of the same from what we've been seeing in the industry, with home sales up broadly around the country and home values firming up. CEO Doug Yearly noted "we are enjoying the most sustained demand we've experienced in over five years."
As I said, the Dow Jones housing index has been on a massive run over the last year, having more than doubled, and at this point the exuberance in housing is no secret. But at the same time, despite the rebound new home sales and construction remain very low by historical standards and have continued room to run given demand and inventory trends. I would say that long term the potential remains for housing, particularly on the new construction end, to continue to progress. Yet, given recent gains in related stocks you have to wonder if they are getting a little ahead of themselves. I think investors in housing can continue to be rewarded long term, but the risk of a near term pullback in the stocks is rising. They've gone from discount bargains to now being priced for momentum, as a number of them are valued with forward P/E ratios of more than 20 (although the earnings projections on housing tend to be more variable than most other industries).
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