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Is Pricing Growth Stalling for Toll Brothers?

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Average selling prices

Toll Brothers (TOL) reported that its ASP (average selling price) for fiscal 2Q16 was $855,500, a drop of 2% on a quarter-over-quarter basis and a rise of 3% on a year-over-year basis.

 

In fiscal 3Q15, the company actually saw a year-over-year fall in ASP. The company attributed this fall to changes in product mix. The Shapell acquisition has caused revisions in the prior year’s ASP. That said, ASP growth is slowing, and that is more or less consistent with what the rest of the industry is seeing.

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For a long time, builders have had the benefit of increasing deliveries and rising ASPs. These factors have allowed them to report big rises in revenues while maintaining tight control over inventory. We’ve seen from some of the other builders that pricing has begun to slip a little, and they are using more incentives.

In fact, for new contracts, the growth is gone. The ASP of net new signed contracts was $825,500 versus $826,300 last year. However, the ASP of homes in backlog is still rising. It was $846,800 versus $793,800 a year ago.

Toll Brothers has exposure to 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 and is expanding to places such as Seattle. By increasing its exposure to these hot markets, it should be able to push up its ASP.

Interestingly, PulteGroup (PHM) and D.R. Horton (DHI) are beginning to target first-time homebuyers with new brands. These lower-priced homes, affordably priced for the Millennial generation, should pull down ASPs.

Other builders such as Lennar (LEN) are reporting modest rises in ASPs. If you would like to trade the homebuilding sector, you can consider the SPDR S&P Homebuilders ETF (XHB).

In the next part of this series, we’ll discuss Toll Brothers’ expectations for its gross margin in fiscal 2016.

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