Playing The Spot Market…For Houses
“With buyer appetite so healthy, approximately one-third of our communities now have backlogs stretching out twelve months. Therefore, in a number of communities, we’ve chosen to hold off taking new home sale contracts rather than lock in sales prices today for deliveries more than a year away. Instead of selling out communities too quickly, we’ve chosen to ration our supply to maximize profit.” So said Robert Toll, CEO of the red-hot high-end homebuilder with his name on the door, in the company’s press release announcing yet another huge quarter yesterday. Toll Brothers, in other words, is playing the spot market.
This move could have interesting consequences down the road, should the red-hot housing market ever blow a gasket.
Back in the prime days of the last energy boom (1979-1981) the oil service companies faced a similar situation: too much demand for their services from oil companies eager to drill as many wells as possible as quickly as possible, and too little capacity.
Solution? They raised prices—and the oil companies happily paid up.
As background, the term “oil service company” actually encompasses a wide range of offerings, from low value-added, anybody-not-too-hung-over-to-drive-a-truck-can-do-this services such as putting down portable mats over swamps so equipment can reach a drilling site in the bayou, to high value-added, don’t-try-this-at-home stuff like building floating offshore rigs the size of a large office building.
When the oil bubble burst—and burst it did, suddenly and with no helpful warning from Alan Greenspan or CNBC talking heads—the oil service industry hit the wall in pretty much a sequential order, from low value-added services with day-to-day contracts that dried up overnight, to the high value-added equipment with long-term contracts that took years to finish.
If you were an anybody-not-too-hung-over-to-drive-a-truck-can-do-this road-builder like Newpark Resources, it was “See ya!” If you were a smart, well-run, big-rig operator like Sedco, you had a few years to work off your backlog before the order book vanished and you had to shut down the yards.
By holding off on new home contracts in certain areas—in the hopes of getting higher prices down the road—Toll Brothers is no longer just “a homebuilder.” It is now also a speculator, making bets that prices will be higher next month, next quarter, and next year.
And since the reality that building a house is of the anybody-not-too-hung-over-to-drive-a-truck-can-do-this type of business, Toll runs the risk of becoming the Newpark Resources of the next building cycle.
But I’m sure they know what they’re doing. Demand this huge never goes away. Just ask the folks at Newpark.
Jeff Matthews I Am Not Making This Up
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.