Luxury home builder Toll Brothers reported a rise in fourth quarter profits on solid sales, up 36% from a year earlier. The average price of delivered homes jumped from $582,000 last year to $703,000 this year. Interestingly net signed contracts were only up 6% in units, but what I’m more interested in is the jump in Toll’s fourth-quarter cancellation rate from 4.6% to 5.5%. This is a 19 percent increase in current-quarter cancellations divided by current-quarter signed contracts. Yes, a small number in absolute terms but the calculation is relevant. I’ll explain why. Toll Brothers’ policy on customer deposits is very strict. If you walk on a Toll Brothers build-to-order home, in many cases you are walking away from a sizeable chunk of cash!
The reason I’m interested in home builders’ cancellation rates is the diminishing return we’re seeing on QE. The effects of the Fed’s massive effort to levitate equity and real estate markets is reaching a point of diminishing returns. This is reflected in the 3-year charts of some of the major home builders including Toll. As you might expect, Toll has held up a little better than some of the other builders because Toll caters to a more affluent home buyer. It’s a QE thing….