REAL ESTATE NEWS...Toll Brothers just painted a clear picture of the US economy — and it's bullish

A home site is listed as sold in a Toll Brothers housing development on December 4, 2012 in South Barrington, Illinois.
BY Bob Bryan

Luxury home builder Toll Brothers announced earnings Tuesday morning and had a solid outlook on the economy.

For Toll Brothers, the issue isn't that the economy is worsening, but that in pockets it's too strong.

"We are experiencing modest lengthening of our production timelines associated with increasing complexity in our homes and a tighter labor market," said CFO Martin Connor.

There are two things going on here.

On the one hand, Connor is saying that because there is less and less slack in the labor market, it is hard for builders to find enough workers to deliver the homes quickly. (Something other homebuilders have noted.)

Secondly, the homes they are building are more expensive, getting at the affordability issue we noted late last year would become an increasing problem for the housing market. In its release, Toll Brothers said it would increase the low-end of its average price range for houses it built by $10,000. It now says its average delivered price will be between $810,000 and $850,000.  

For its fiscal first quarter, Toll Brothers met analyst expectations for earnings per share at $0.40 and beat revenue expectations, generating $928.6 million versus a forecast of $910 million. The stock was roughly unchanged in pre-market trading. 

Executive Chairman Robert Toll added that right now the way the company is viewing the economy is in stark contrast to what the stock market is thinking. 

Here's Toll's outlook:

"The stock market seems to be pricing in a steep decline in the economy and, along with it, our sector. We, on the other hand, are seeing signs that reflect strength and positive momentum in our business based on six consecutive quarters of year-over-year contract growth in both dollars and units... Industry-wide housing starts remain far below normal, and new home supply remains constrained.Interest rates are very attractive, unemployment is the lowest since 2008, and home values are rising."

Now, CEO Douglas Yearley did somewhat temper this view, saying we won't necessarily see explosive growth but there should be a steady upward trend in the housing market.

Additionally, Yearley said the stock market has been weighing on the most recent activity the company has seen, saying:

Deposits and contracts signed in the first three weeks of February, the start of our second quarter, were basically flat compared to the prior year. This is understandable given the recent stock market decline and global economic uncertainty. Positively, traffic was up 13% over the same three weeks and appears to be improving in quality, which gives us reason for optimism for the balance of the spring selling season.

Yearly added that, "We continue to believe that the industry remains on a trajectory of slow but steady growth with pent-up demand that will release over time."