Home Builders Fall on Growth Worries

Luxury home builder Toll Bros. Inc. on Wednesday posted sharply higher quarterly profit, but the response of investors was to hammer its shares and those of its rivals.

The industry remains optimistic about its prospects in 2004, but investors are growing more leery after the stocks’ spectacular gains this year and as concerns grow about mortgage rates next year.

Toll Bros. said earnings in its fiscal fourth quarter ended Oct. 31 jumped 35% to $93.4 million, or $1.19 a share, from $69.4 million, or 93 cents, a year earlier. Sales rose 28% to $903 million.

The company, which is based in Pennsylvania and builds in 21 states including California, said it was on track for profit to grow at least 20% in fiscal 2004 and by a similar amount in fiscal 2005.

But the stock slid $1.58, or 4%, to $37.87 on the New York Stock Exchange. It has fallen 12% since reaching a record $43 on Dec. 1.

Share of other home builders also plunged Wednesday. Pulte Homes Inc. slid $5.48, or 6.1%, to $84.90; Lennar Corp. dropped $4.86, or 5.1%, to $90.75; and KB Home lost $3.30, or 4.8%, to $65.12. All trade on the NYSE.

All of the stocks have rocketed this year, so some profit taking would be expected as year-end nears, analysts say.

The bigger question is whether the industry may be too bullish about its sales and profit potential in 2004 -- especially considering the chance that loan rates could rise if the economy continues to expand briskly.

The Mortgage Bankers Assn. said Wednesday that its index of mortgage applications fell last week to the lowest level in more than a year as fewer people sought to refinance.

“The market believes the drop-off in refinancing should be extrapolated into new-home sales,” Raymond James & Associates analyst Paul Puryear said.

The average U.S. mortgage rate was at 6.02% last week, up from 5.21% at the year’s low in June but below the summer peak of 6.34% in August, according to lending giant Freddie Mac.

But some analysts say the outlook for new-home purchases remains strong.

Kevin Tynan, analyst at Argus Research Corp. in New York, said the supply of homes was so tight that mortgage rates would have to top 8% before it would hurt the building industry.

The National Assn. of Home Builders on Wednesday boosted its forecast for 2004 sales after higher-than-expected demand in the final months of this year.

The group said 1.04 million new homes probably would be sold, up from its previous estimate of 994,000 units. Still, the new estimate is down from the 1.08 million homes the group expects to be sold this year.

“Even though mortgage rates are higher, they are still very low from a historical standard, and the consumer seems to have accepted it,” said Gopal Ahluwalia, the group’s head of research. “Fourth-quarter sales have been much stronger than expected.”