Senior Vice President & Chief Financial Officer, TOLL BROTHERS INC
Toll's Connor Says Economic Data Bodes Well for Housing
Jan. 5 (Bloomberg) -- Martin Connor, chief financial officer at Toll Brothers Inc., talks about the outlook for the U.S. housing market.
About Martin Connor
Martin Connor, Senior Vice President and Chief Financial Officer of Toll Brothers, stated in 2011 and 2012 that the housing market was recovering. He said in 2012 that general economic news was trending upward, which he said boded well for housing, and that the spring selling season would be telling. Connor described the New York metro area as the company's hottest market, with high-rise communities in Hoboken, Manhattan, and Brooklyn performing well. He also said Toll Brothers was actively seeking land opportunities in California. Connor said in 2011 that the government should "step back and let housing heal itself," arguing that a previous tax credit had not helped and may have muddied the picture. He noted that Toll Brothers had plenty of capital and was seeking places to deploy it, and that the company was pleased to be at a break-even basis after the downturn. Connor described Toll Brothers' buyers as having solid credit, with average FICO scores in the mid-650s and 30% down payments, and said 18% of buyers paid cash.
Transcript (28 segments)
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Interviewer0:00
Toll Brothers, a luxury home builder based in Pennsylvania, says not only is the worst over for the housing market, but a rebound will gain room in 2012. Has the industry turned the corner? Martin Connor is Chief Financial Officer and Treasurer of the company, and he joins us now. Mr. Connor, welcome to Bloomberg's Bottom Line. Thanks so much for coming on today.
M
Martin Connor0:18
Happy to be here. Thanks for the opportunity.
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Interviewer0:21
Mr. Connor, we're hearing all these conflicting economic reports over the past year about the housing market. One month things seem to be fine, next month we're hearing about more foreclosures that are actually happening. Has the housing market turned the corner?
M
Martin Connor0:36
I don't think it's quite turned the corner yet, but the general economic news, as you've just mentioned, is trending upward, which bodes well for the housing market. Right now, one of the key areas that we look for is that spring selling season, and that's going to be telling from now until the end of the year.
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Interviewer0:55
Is there room for optimism on that front as well?
M
Martin Connor0:57
We are optimistic about the spring selling season. Between the general positive economic news we've heard over the last six to eight weeks, including a pretty solid retail season, the service industry jobs you just mentioned, the continued low mortgage rates, and the continued all-time high or near all-time high affordability, it's a great time to buy a house. And we hope confidence is increasing to such an extent that people will be willing to make that purchase.
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Interviewer1:30
Mr. Connor, yesterday I spoke to Robert Heller, the former Federal Reserve governor, and we were talking about the Fed minutes, the FOMC minutes that came out. One of the areas we discussed was housing and how the housing market can possibly return to health. One of the parallels we discussed yesterday was the role that banks have in this. A lot of people have been hurt badly during this housing downturn. A lot of people's credit has been ruined, therefore they may not be able to go to the bank and get a loan to buy a home or maybe to refinance. What role do the banks have in thawing out credit and helping people achieve the American dream?
M
Martin Connor2:08
Well, I think the banks do have a significant role, and the issue of foreclosures and credit issues are significant. Fortunately, here at Toll Brothers, we still see buyers with significantly solid credit. Our average FICO scores of our buyers are in the mid-750s. They continue to put on average 30% down as a down payment and only leverage about 70% of the house purchase. And that trend has continued throughout the downturn.
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Interviewer2:42
But is it safe to say that because a lot of people have been hurt and their credit has been damaged, that going forward we may see a permanent group of people who unfortunately cannot buy a home and they will be renters?
M
Martin Connor2:56
Well, I think we saw homeownership rates in this country move to the upper 60% of the population from the historical averages of the mid to lower 60%. It would not surprise us here at Toll Brothers if we revert back to that mid to lower 60% as a result of some of the issues we've gone through.
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Interviewer3:19
Well, even at this moment, the housing industry is only producing about 500,000 homes. What's the norm?
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Martin Connor3:26
The norm is anywhere between 1.6 and 1.8 million. It ratcheted up to the low twos in the height of the market in the mid-2000s. But household formations, another reason for optimism in our view, are expected by Harvard to be in the 1.5 to 1.6 million range for the next decade. And when you only are producing as an industry 500,000 units, it should not take too long, and maybe we're already through that period, before we get back in balance.
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Interviewer3:56
Sir, those homeowners who were forced to foreclose, is any chance that they'll eventually return to the market?
M
Martin Connor4:02
Well, I think they will. And certainly they need to live somewhere. If they were residents in a foreclosed home, they've moved either into a rental unit or with family and friends. At some point, they probably want to move out from family and friends. They may move into new housing that they purchase, or they may continue to rent. It remains to be seen.
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Interviewer4:27
All right, let's take a look then at the overall economy. If the economy does pick up, that means traditionally housing stocks start to take off. Is that something that we might see going forward here in 2011?
M
Martin Connor4:40
Well, we'd certainly be in favor of it here at Toll Brothers. But the history, as you mentioned, is that housing stocks do have a tendency to run when the news starts to turn positive and when it has some true evidence rather than just optimism behind it.
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Interviewer4:58
Mr. Connor, as you know, there are some regional concerns, and I'd like to try to pick some of these apart region by region. Let's start with Las Vegas and Phoenix. One of the problems there is a dramatic depreciation in home prices. What's the future look like there?
M
Martin Connor5:14
I think Phoenix and Vegas have a long, slow road to recovery. The negative equity that many people have in those homes, the significant backing up of home values in those markets, will take a long time to work through. Additionally, there's a lot of foreclosures in that marketplace that have to work through the pipeline.
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Interviewer5:39
And one of the other regions that unfortunately has been hit hard is down in the Florida area. Are there any good opportunities down there right now?
M
Martin Connor5:47
Well, we've actually purchased some land in Florida during 2010, and we continue to look for opportunities. You know, the sun will continue to shine in Florida, and people will continue to want to retire there. We believe that there are good opportunities. We are having some success in certain of our communities in Florida. There are other places that will struggle.
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Interviewer6:09
What about the state of California? A lot of states like California, New Jersey, Florida, they are having severe financial problems, and a lot of municipalities are having to make very Draconian cuts, and a lot of social services have been affected. What does California look like in your opinion?
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Martin Connor6:28
Well, we may be a little different than others in that we serve the luxury market, and the social service cuts don't have as much an impact on us as they may have in other places for other builders. But California is a market we are very much interested in. We actually are actively seeking opportunities to buy land there, and we would like to have more communities in California than we have right now. We think it's on the road to recovery from a housing perspective.
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Interviewer7:01
And finally, here in the New York metro area?
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Martin Connor7:04
That's our hottest market right now. We have high-rise communities in Hoboken, in Manhattan, and in Brooklyn, and they are doing very well. Additionally, the suburban New York and New Jersey marketplace never went back as far as other places did and is actually very solid for us right now.
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Interviewer7:29
And Mr. Connor, in our final 30 seconds, the bottom line for the housing market in 2011 is?
M
Martin Connor7:35
I think it's a great time for people to buy a home. Affordability is near all-time highs, mortgage rates are near all-time lows. There are bargains out there for the consumer, and it's still part of the American dream to own your home.
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Interviewer7:50
Martin Connor, the Chief Financial Officer of Toll Brothers, joining us live from Pennsylvania. Mr. Connor, thank you so much. We appreciate it.
M
Martin Connor7:57
Thank you for the opportunity.