Toll Brothers is the latest builder to capitalize on housing shortage 'phenomenon'

The lack of homes has been good for homebuilders.

Americans seeking to buy a house are faced with fewer choices in the resale market, pushing many to the newly constructed home market.

“This phenomenon has become a boon for homebuilders and especially the larger, well-capitalized public builders who are more efficient and better positioned to take advantage of opportunities compared to smaller private builders,” Toll Brothers (TOL) CEO Douglas Yearley said on the company's earnings call Wednesday after reporting better-than-expected second-quarter profits and revenue late Tuesday.

The results also come the same week that new home sales unexpectedly increased in April.

“With such low levels of resale inventory on the market, buyers are gravitating to new homes. As they do, they benefit not just from the opportunity to buy new, but they can also take advantage of incentives like rate buydowns that are generally not available on resale homes,” Yearley added.

The environment has allowed homebuilders to develop more on spec, seek out first-time buyers, and rejigger their outlook for the year, with Toll becoming the latest example of how their fortunes are faring.

Spec is on point

Toll Brothers delivered 4% more homes, reaching 2,492 units in the second quarter at an average price of $1 million, generating home sales revenues of approximately $2.5 billion. That’s up 14% compared with the same period last year.

“Deliveries exceeded the midpoint of our guidance by nearly 400 units, primarily due to cycle time improvements and an increase in the number of spec homes we settled in the quarter,” Yearley said.

Demand for its spec homes represented about 40% of the builder's home orders. Spec homes are classified as an unsold home with at least a foundation in the ground, according to the builder. Toll said it expects spec homes to make up 30-40% of their homes in the future.

That echoed what PulteGroup Inc. (PHM) experienced after increasing its spec starts.

"With more units in production, we can better meet buyer demand as more consumers are seeking quick move-in homes as a hedge against rising mortgage rates," PulteGroup CEO Ryan Marshall said last month on his company's earnings call.

On a gross basis, the builder's first-quarter sign-ups increased 1% year over year to 8,900 homes. Of those nearlu 60% were spec sales.

"So the decision to increase spec starts was the right one," Marshall said.

Courting entry-level buyers

While homeowners continue to hang onto their low-rate mortgages rather than selling, keeping their existing homes off the market, homebuilders have been busy enticing those frustrated first-time buyers.

“The homebuilders are well-positioned,” GLOBALT Investments Sr. Portfolio Mgr. Thomas Martin told Yahoo Finance Live on Wednesday. “That trend is going to continue as long as rates stay high and customers get used to the higher rate environment.”

Toll is still offering reductions, around $50,000, which is down from $70,000 discounts it provided in earlier quarters. The builder, which has historically been a luxury home developer, is also exploring new markets with lower price points.

“We're building more spec in less expensive areas, not because of a strategy but more because that's where we now build,” Yearley said. “About 45% of our sales right now are in what we call internally this affordable luxury price point."

"Millennials, in particular, are buying their first home later in life when they have higher incomes and accumulated wealth," he said.

PulteGroup followed a similar strategy, with 40% of its business targeted at entry-level buyers.

"That’s a little bit richer than it was four, five years ago for us," PulteGroup CFO Pablo Shaughnessy said last month on the company's earnings call. "That was conscious on our part."

And D.R. Horton Inc. (DHI) has gone with smaller footprints when it makes sense.

"I think that's just all part of the mix here, slight reductions in the size of our homes trying to address the affordability equation," D.R. Horton CFO Bill Wheat said on his company's earnings call last week. "That's an ongoing effort for us."

Rosier outlook

The favorable headwinds have led to improved guidance for some builders.

For instance, D.R. Horton offered full-year revenue guidance of $31.5 billion to $33 billion, above FactSet consensus estimates for $28.41 billion.

Toll Brothers offered a similar rosy outlook.

Toll expects to boost its housing stock, delivering between 8,900 and 9,500 homes, up 700 homes from the midpoint of its previous guidance. Additionally, the homebuilder increased its home price range to $975,000 and $995,000, translating to a revenue projection of $9.2 billion for the full year. It also upped its full-year adjusted gross margin guidance from 27% to 27.8%.

"The improvement in cycle times, combined with a stronger demand environment and our focus on increasing spec production has led us to increase our full-year deliveries guidance," Yearley said.

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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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