Mark Blinch/Reuters
A construction worker works on a new house being built in a suburb located north of Toronto.
- Toll Brothers' home orders plunged 13% year-over-year in the fourth quarter, the first drop since 2014.
- The drop was due to a housing slowdown amid rising interest rates, and driven by a huge falloff in California demand, said CEO Douglas C. Yearley, Jr.
- The company's quarterly results beat on both the top and bottom lines.
- Watch Toll Brothers trade live.
Toll Brothers, one of America's biggest homebuilders, warned Tuesday that the housing market is feeling the pain of rising interest rates.
"In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown," CEO Douglas C. Yearley, Jr. said in the company's fourth-quarter earnings release.
"California has seen the biggest decline. Significant price appreciation over the past few years, fewer foreign buyers in certain communities, and the impact of rising interest rates all contributed to this slowdown."
The Federal Reserve has hiked its key interest rate three times this year and signaled one more hike in December. Its benchmark for borrowing costs - the federal funds rate - now floats in a range between 2% to 2.25%, the highest since October 2008, right before Lehman Brothers imploded.
Pockets of the economy, like housing, indicate that higher borrowing costs are starting to bite.
Toll Brothers said it earned $2.08 a share - $0.25 higher than what analysts surveyed by Bloomberg were expecting. It generated sales of $2.46 billion, topping the Wall Street consensus of $2.35 billion. However, its home orders plunged 13% year-over-year to 1,715, making for the first drop since 2014. Analysts were expecting 2,073 signed contract units.
Looking ahead, the company expects to deliver between 1,350 and 1,550 units, in the first-quarter, at an average price of between $850,000 and $880,000.
Toll Brothers only provided near-term guidance due to recent "uncertainty of the demand picture," Jack Micenko, an analyst at Susquehanna Financial Group, said in a note on Tuesday.
Micenko said downside risks "include a lower level of demand than we forecast for new housing, no loosening or tightening of mortgage underwriting standards, less job growth, or declines in home prices."
Micenko has a "positive" rating and a price target of $54 - 42% above where shares were trading.
Toll Brothers tumbled almost 7% early Tuesday, to $31.33 a share. It was down 35% this year.
MI