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Toll Brothers Sees an Unusual Decline in Average Selling Prices

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Average selling prices

Toll Brothers (TOL) reported that the average selling price (or ASP) for 3Q15 was $724,000, an increase of 1.5% on a quarter-over-quarter basis and a decrease of 1% on a year-over-year basis. We saw a similar flattening of ASP growth in the second quarter as well. The company attributed the lack of growth to a change in product mix.

For a long time, builders have had the benefit of increasing deliveries and increasing average selling prices. This has allowed them to report big increases in revenues, all while maintaining tight inventory control. We have seen from some of the other builders that pricing has begun to slip a little and that they are using more incentives.

That said, when you look at average selling prices for signed contracts, the picture brightens. The average selling price of net new signed contracts was $834,000 versus $717,000 last year. The average selling price of homes in backlog was $829,000 versus $737,000 a year ago.

So, while it appears that ASP growth took a breather in the last couple of quarters, it is poised to accelerate again.

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Toll has exposure to the hot markets

Part of the reason for the expected acceleration is due to new properties being offered in New York City, where foreign demand for US dollar–denominated assets continues to be strong. The company just bought land in the West Village of New York City during the quarter. Toll Brothers is also seeing the same thing on the West Coast. By increasing its exposure to these hot markets, it should be able to push up their average selling prices.

Interestingly, PulteGroup (PHM) and D.R. Horton (DHI) are beginning to target the first-time homebuyer with new brands. These lower-priced homes, affordably priced for the Millennial generation, should pull down their average selling prices. Other builders like Lennar (LEN) are reporting modest increases in average selling prices. Investors who would like to trade the homebuilding sector should consider the S&P SPDR Homebuilder ETF (XHB).

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