Ride The Housing Recovery With Toll Brothers

Image via Montgomery County Planning Commission/Flickr CC

The US housing market finally had a full recovery in 2016 since the devastating housing bubble crash in 2008, to reach $29.6 trillion. There are several trends that are supporting this recovery. First, there is the pent-up demand for housing during the aftermath of the recession, which coincided with the trend of raising household formation.

Source: Toll Brothers

While household formation is gaining momentum, the housing starts have not recovered from the 2008 Recession and this gives home builders an advantage. On a larger context, unemployment had dropped to 4.4%, below the Fed’s expectations of 4.5%, with 3.8% GDP growth is projected.

All this points to a strong economy, which will spur demand for new homes. While there are many segments of society that will look for housing, a sure bet is the affluent segment. Putting aside the question of fairness, the historical trend had favored the rich and it is set to continue. The Wall Street Journal reported that 95% of the gains in the recovery period of 2009 to 2012 went straight to the pockets of the wealthiest 1%.

Source: Washington Post

The Washington Post reported that the top 0.1% of the wealthiest own as much wealth as the bottom 90% in 2012 and US President Donald Trump’s new tax policy would once again make the rich richer. Once again, as investors, we put aside moralistic concerns to follow the money.

If you are a high net worth individual who wants to own a new luxury home in the United States, the first home builder that comes to mind would be Toll Brothers (TOL). They have over 50 years of experience in building luxury homes and golf courses. The brand recognition of Toll Brothers is significant and they have produced strong results.

Strong Margins and Raising Earnings

If you were to look at the first chart above, you can easily see the picture of rapidly rising demand (increasing household formation) and depressed housing supply (weak housing start), which is playing catch-up. This allows Toll Brothers to maintain their strong margins of over 20% for the foreseeable future amid raising sales and earnings.

Source: Toll Brothers

According to the latest call transcript, Toll Brother’s CEO Douglas Yearley revealed that Toll Brothers had the ability to raise their price on average across the United States in this quote:

‘For the quarter, we on average nationwide we raised prices a little more than $5,000 per home.

We had cost go up about $2,500 per home. So, we continue on a national level on average to outpace cost increases, but not by a whole lot, by $2500.’

Despite the rising cost in materials, labor and land, Toll Brothers had been able to reign in costs. This is done in the face of its expansion into West Coast and its acquisition of Coleman Homes of Idaho in 2016. As such, they are likely to see continued expansion in its sales. In the previous quarter, they had increased their contracts by 23% to $2.02 billion and backlog by 26% to 2,511 units.

Their ability to sell properties, which cost an average of over $830,000 each, and the ability to convince wealthy Americans to spend an average of $120,000 to renovate their houses to perfection speaks volumes of their branding. Of course, a wealthy lifestyle is not complete without golf courses, which means extra spending on golf equipment with Golf Assessor.

Habits of High Net Worth Clients

For American executives to make it to the top 1%, one of the essential elements is to be human centric, according to Harvard Business Review. As they travel, these savvy executives will require affordable office spaces to contain costs for their new ventures, which is unproven at the initial stages. If it is long-term assignment, they are likely to go there with their spouses.

If their spouses are good at languages and can teach them effectively, they tend to gravitate towards generating extra income through giving language classes. For instance, they advertise themselves as English teachers in Singapore and Hong Kong through the online platform TUTOROO.

Source: Toll Brothers

The clients of Toll Brothers are required to earn at least $10,500 per month and such extra income would be helpful as they travel overseas and incur costs. The concept of utilizing spare capacity is not new. This is also part of the value proposition behind StudioMatch which exists to make it easy for studio users to discover and book studios which increases the utilization of studios.

In other words, high net worth clients have the habit of making more money to improve their lives and can be relied to spend on their housing needs.

A Mark Above the Rest

As I mentioned earlier, there are many home builders out there but Toll is the only one which has strength in the luxury home market as seen in the chart below.

Source: Toll Brothers

The choice is obvious.