CEO Perspective on 2022 Housing Market | Housing PRICES in 2022
A lot can be gathered on the state of the housing market and where the housing market is headed in 2022 and beyond based on comments by the CEO’s of the top home builders in the United States.
In late December, the CEO of Toll Brothers, which is the largest luxury home builder said, “Supply is very limited and the resale market is as tight as it was before.” Lack of supply and high demand have given builders such as Toll Brothers (ticker: TOL) pricing power. The average sale price on newly contracted homes rose nearly 25% year-over-year to $1 million in its latest quarter ending October.
This has resulted in the earnings of builders such as Toll Brothers to soar. Toll shares have risen 63% to nearly $70 this year, along with other homebuilder stocks. Toll still trades cheaply for around seven times the estimated FY 2022 income as investors caution about the extent of the current housing uplift.
Rivals such as DR Horton (DHI) and Lennar (LEN) get most of their business from entry-level buyers and have an average selling price of around $400,000. Toll expects to deliver 12,000 homes in 2022, against about 90,000 for Horton.
With Toll being at the high end of the market, they have various benefits. For example, about 20% of toll buyers pay cash and for borrowers, the average loan-to-value ratio (loan value divided by purchase price) is less than 70%. “Even if rates go up, our buyers do not have the issue of affordability to buyers of lower-priced homes,” Toll CEO has said.
Toll Brothers, like its peers, continues to face supply shortages that are slowing construction. According to the Toll Brothers CEO, it now takes an average of 12 to 13 months to complete a house, compared to nine months before the start of the global issue. “We have not seen an improvement in the supply chain and do not expect to see an improvement for some time. We expect to see improvement in the second half of 2022.” Toll Brothers is facing a shortage of more mundane items like appliances, windows, garage doors, and ductwork materials. “Things you don’t take lightly,” the CEO said.
Toll Brothers is sitting at around 80,000 lots for more than six years of construction at the projected 2022 construction rate. Getting land in high-cost areas where zoning can be difficult remains a challenge, and Earley says he reviews every potential land deal personally.
So what are the key takeaways:
1. The builders continue to have pricing power
2. Supply chain shortages continue to impact home builders
3. Home builders do not think they will be impacted if interest rates rise. There is enough demand.
4. Homebuilder stocks potentially pose an interesting opportunity for retail investors
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