Sunday, April 09, 2006

Toll Brothers CEO Sees Real Estate Growth

Predictions of doom and gloom in the housing market are overblown and there is still room for real estate to grow as long as mortgage rates stay near historical lows, according the head of Toll Brothers, the nation's largest luxury homebuilder.

"Last time I saw 6 percent was 1966, except for the last couple of years," Robert Toll, the company's chairman and chief executive, said Wednesday in an interview with The Associated Press. "If rates go to 7.5 percent, we'll take it. We can still do a whole lot of business."

This week, the average rate for a 30-year, fixed-rate mortgage came to 6.37 percent with 0.6 point, according to Freddie Mac. Rates have been in the 5 percent to 7 percent range since 2001. Before that, they were last around 6 percent in the early to mid-1960s, the mortgage agency said.

On Thursday, housing stocks also got a boost from news that the number of new homes under construction didn't fall as much as expected in February. The Philadelphia Housing Index rose by 1.4 percent in afternoon trading.

On the New York Stock Exchange, shares of Toll Brothers rose $1.29, or 3.9 percent, to close at $34.18; shares of homebuilder KB Home rose $1.62, or 2.5 percent, to $66.74; and shares of homebuilder Centex Corp. rose 90 cents, or 1.4 percent, to $64.90.

While the housing market has slowed in the recent months from its red-hot pace as prices have risen, demand has stayed healthy as the economy remained resilient.

With inflation remaining tame, Toll believes new Fed Chairman Ben Bernanke "will probably err on the side of caution and not overexuberance" when setting targets for short-term interest rates.

Toll, who has been in the real estate business for four decades, agrees with industry pundits who predict a "soft landing" ahead for housing.

He bases his belief on the mixed results he's seeing at his communities - he can still raise prices at certain properties in several markets. In past housing downturns, he said, pricing power generally was weak across the board.

"I truly believe it's going to be soft. In selected markets, for selected locations ... you still have pricing power," he said. "If this is a hard time, I'll take it. I'll keep it."

Toll also said his company is looking to enter new markets, such as Houston, St. Louis, Cincinnati, Cleveland, Portland, Ore., and Seattle.

Lawrence Horan, an analyst with Janney Montgomery Scott, said demand for housing is being fueled by an increase in the number of households.

"That is a secular demographic shift, which is not going to reverse unless we close our doors and not let anyone get into the country anymore," he said. "If you have a chronic shortage (of housing), prices tend to go up to the rate of inflation or a little more. You get to an equilibrium ... I think we're in that period now."

But what could put a snag in housing is NIMBY - Not In My Backyard - tensions.

Toll Brothers is in a quandary over the development of a new national veterans cemetery. The U.S. Department of Veterans Affairs in January selected a 214-acre site in Upper Makefield Township, Pa.

Toll had agreed to sell the land to the VA for $7 million, which it says is a discounted price, with the agreement that it would get density concessions from local officials to build 235 homes on two adjoining properties. Not only will Toll have to rush to get through the approval process by Oct. 1 - the date when the VA wants the sale to close - but the developer has to appease residents as well.

"The opposition comes from those who are already there and don't want it in their backyard," Toll said. "I'm not bitter. I don't castigate or denigrate. It is what it is."

Last year, Toll Brothers began selling its luxury condominium complex in Philadelphia called Naval Square after overcoming community opposition to its development.

He also gets irked when people call his luxury homes "McMansions."

"It bothers me and I ignore it," Toll said. "They're not McMansions, they're mansions. The 'Mc' is a prefix put there by those who haven't got one."


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