Toll Brothers Warns: Lending Crackdown a Drag -- but also cite Jersey City as a "bright spot"

Dow Jones Newswires -- By John Spence -- 5/9

BOSTON (Dow Jones) -- Toll Brothers Inc. said Wednesday that it doesn't expect to meet its full-year profit outlook and that more stringent lending standards as a result of problems in subprime mortgages are reverberating in its own luxury-home market.

The Horsham, Pa.-based company (TOL) reported preliminary results ahead of its full financial results for the second quarter, scheduled for release on May 24. For the quarter ended April 30, Toll said home-building revenue fell 19% from a year earlier, while net signed contracts dropped 25%.

"Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets," said Robert Toll, the company's chief executive, in a statement.

The company estimates taking write-downs between $90 million and $130 million on a pre-tax basis for the quarter. Home builders have been booking inventory impairment charges on land as the housing market has slowed, and many have been reporting quarterly losses.

Toll said it doesn't expect to meet its latest 2007 full-year profit outlook, which it had pegged in a range of $1.46 to $1.85 a share. It also said it anticipates reporting a profit for the second quarter.

Analysts polled by Thomson Financial are looking for earnings of $1.41 a share and 42 cents a share, respectively.

Toll said it thinks less than 2% of its customers use subprime loans, which have been in focus lately due to higher defaults. Subprime mortgage loans, designed for buyers who don't meet banks' strictest lending standards, have added fuel to the housing boom, but now that demand has pulled back, problems in the subprime sector have weakened an already-shaky housing market.

Despite the small percentage of Toll's customers who use subprime loans, "the impact of stricter lending standards arising from problems in the subprime market is negatively affecting affordability at lower price points," the CEO said.

"This, in turn, can impact the entire 'housing food chain,' including some of our potential customers' ability to sell their existing homes," he added.

These tougher lending standards and fewer new subprime mortgages are likely to further erode housing markets this year and next, the National Association of Realtors says.

In its monthly forecast update, the NAR said Tuesday it expects existing home sales to fall 3% in 2007 from a year earlier, while new-home sales are forecast to fall about 18%, compared with a 14% drop predicted last month. Housing starts are seen falling 19%, the NAR said.

On the positive side for Toll, the company said its cancellation rate fell to 19% from 30% on a quarter-over-quarter basis.

About 70% of cancellations in the latest quarter were from contracts signed more than nine months ago. "This means that buyers are typically cancelling closer to closing, likely due to price or inability to sell their existing home, instead of financing issues that typically occur earlier in the process," wrote Banc of America Securities analyst Daniel Oppenheim in a report to clients.

CEO Toll also cited as "bright spots" a handful of markets -- New York City, Hoboken and Jersey City, N.J.; Dutchess County in New York; southeastern Connecticut; the Philadelphia metropolitan area; Raleigh, N.C.; Dallas and Austin, Texas, and parts of Northern California.

The biggest challenges facing the industry right now include reducing the inventory of unsold homes on the market and restoring buyer confidence, he said.

Toll Brothers shares are off about 9% so far this year.

The company's preliminary results "show a continuation of weak demand trends into April similar to what Hovnanian (HOV) reported last week, with orders continuing to fall, an additional round of impairments and cancellation rates that remain above normal levels," wrote Deutsche Bank analyst Nishu Sood in a research note.

"It all adds up to a recipe for keeping pressure on home prices which should begin to accelerate in their declines in the next few quarters," the analyst said.

Dow Jones Newswires
05-09-07 1003ET

Copyright (c) 2007 Dow Jones & Company, Inc.

PS - for all those who suggested I was 'full of it', GO WASH YOUR MOUTH OUT WITH SOAP

It is interesting to see what is also happening in London - - from today's Guardian

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The crash is coming and it could be soon

The Bank of England must act decisively and swiftly to curb the current house price madness

Will Hutton
Sunday May 6, 2007
The Guardian Observer

It is crazy and it defies logic. The continuous rise in house prices over the last five years has become one of the facts of British life. It divides the generations: parents often sit on hundreds of thousand of pounds of equity propped up by their children's willingness, as first-time buyers, to incur mortgage debt on a scale never before dreamt of. It has made millionaires many times over of those who have plunged into the buy-to-let market. We are obsessed by house prices.

The consensus is also clear. The rate of growth may slow or even stagnate, but buying flats and houses is a one-way bet. After all, money is still cheap; lenders fall over themselves to lend on ever laxer terms; the economy is strong; boom-bust economics is over courtesy of a supposedly professional independent Bank of England; and there is a property scarcity almost everywhere. Nothing is as sure as investing in British bricks and mortar.

There are pessimists (take a look at the website housepricecrash.co.uk), but memories are short. Who remembers that only 15 years ago the British housing market went badly wrong; prices plunged and nearly a million buyers were trapped in their homes for years because the price was lower than the value of their mortgage? A crippling 15 per cent mortgage rate had been imposed to quell an unstoppable burst of lending that was pushing a dangerous rise in inflation.

The risk of history repeating itself is known, but too few people believe it. Not the clubs of four or five young people 'co-buying' in order to have a chance of getting into the housing market. Not the wave of buyers of flats that are bought speculatively either to be let or which just stand vacant (and which now constitute one of the prime drivers of demand). Seventy percent of the 20,000 flats built in London last year were bought by buy-to-let speculators.

Neither they, nor those who lend the money, appear to be concerned that prices will fall. Cheltenham and Gloucester has just decided that it will finance small buy-to-let borrowers to buy up to nine properties rather than the three at present. The Bank of Ireland, according to the Financial Times, has just raised the maximum it will lend to any one entrepreneur by eight times - from ?2.5m to ?20m. It is risk-free lending. It may be that the yield from rents is lower than the costs of borrowed money, spelling disaster, but as property prices only rise, nobody worries. It is stories like these that prove we are in a bubble.

House prices are now six times average incomes - 20 per cent higher than before the calamity of the early 1990s - and forcing ever higher amounts of mortgage and bank lending, which, in turn, push up inflation. Three weeks ago, the governor of the Bank of England, the intellectually self-confident Mervyn King, wrote to the Chancellor to explain why inflation had broken through the 3 per cent upper limit of the range within which he and the bank are charged to keep it. The loss of face was played down, explained as largely a technical hitch. The fall in energy prices has yet to feed through into price inflation is the story; as it does, inflation will fall back towards 2 per cent. There may be another small rise in interest rates to 5.5 per cent this Thursday, but that will be worst of it. Everybody can relax.

But there is a deeper-seated concern within the bank and rightly so. Its own forecasts acknowledge that over 2008 and 2009, there is a considerable risk that inflation could rise above 3 per cent and carry on rising, and for very similar reasons that inflation got out of hand in the late 1980s. No economy anywhere with reasonably full employment can allow bank lending to grow at 14 or 15 per cent a year as it is in Britain at the moment and expect inflation to remain at 2 per cent. Demand soars above any probable supply, earnings growth picks up and imports balloon. Either lending is forced lower by higher interest rates or inflation accelerates.

All this was obvious in 1988 and it is just as obvious today. The bank confronts a similarly dangerous rise in lending and credit, largely because it is intellectually uneasy about accepting that house-price inflation can trigger more general inflation and, moreover, can be caused by banks behaving as the Bank of Ireland and Cheltenham and Gloucester have done. It is curiously un-streetwise.

Bank lending must decelerate to the single-figure growth rates of the last 10 years if the bank is to meet its 2 per cent inflation target. And to achieve that, interest rates have to go higher and stay high. The bank has to act decisively on Thursday and give an unmistakeable signal of its intent. It should raise rates to 6 per cent. If it does not, it will only have to move them even higher next year because it bottled out of acting pre-emptively.

It has to break the folklore that the only direction of house prices is up - and all the attitudes that go with it, from buy-to-let speculators hoarding unlet flats to banks lending money to allcomers with no questions asked. If it could quarantine a proportion of bank reserves and police the lax terms on which banks lend, then it could protect against the worst of the sting, but this is ruled out by doubts whether such measures would work, their impact on bank profits and how they would damage London's role as the ultra laissez-faire financial centre. These are valid, if questionable, reasons and they put all the load on interest rates.

So be cautious. Don't take out an extreme mortgage at the top of the market. Don't feel sympathy for the distress about to hit the buy-to-let market and the lenders who recklessly fed the fever. But do ask hard questions about how our financial system is managed.

The residential market 'bubble' has burst and the rats are leaving the sinking ship!

LeFraks Selling Brooklyn, Queens Portfolio for $250 M.

by John Koblin Published: May 9, 2007
Tags: Real Estate, Brooklyn, Investment Sales, LeFraks, Queens

A residential portfolio in Brooklyn and Queens owned by the LeFrak family is in contract to sell for $250 million, two sources said. The portfolio, dubbed the Kings and Queens portfolio, consists of about 2,000 apartments.

The sources did not identify the buyer. Richard LeFrak, the C.E.O. of the LeFrak Organization, was reached by phone and would not comment on the deal; he cited confidentially agreements.

The LeFraks have been a city landlord since 1901, and have built more than 250,000 apartments, including LeFrak City, the Queens complex with more than 5,000 units.

Darcy Stacom and Bill Shanahan, the powerful CB Richard Ellis duo, are the brokers in the LeFrak transaction. Neither would be interviewed for this story.

Residential-portfolio sales have been in the news lately. Urban American, along with its financial partner City Investment Fund, purchased a series of buildings in Harlem and one on Roosevelt Island for $940 million, the second-biggest residential deal in Manhattan history.