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Toll Brothers undermined by soaring mortgage rates

The bearish sentiment is expected to continue as long as rates remain in their uptrend.

A leading provider of luxury homes in the US is Toll Brothers, Inc. For the past ten years, Toll Brothers has enjoyed a remarkable run of revenue growth; nevertheless, its outlook is deteriorating as the housing market cools due to skyrocketing mortgage rates and concerns about an impending economic crisis.

Since Toll Brothers released its quarterly results on August 23, TOL shares have lost ground relative to their December 2021 highs, and its profits projection for FY23 has deteriorated.

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Toll Brothers is a diversified luxury homebuilder that runs its own businesses for land development, architecture, engineering, mortgages, and titles, in addition to other services that fit within its upscale offerings, including golf course development. Additionally, TOL has its own manufacturing, home component assembly, and distribution of timber businesses.

Toll Brothers serves almost all segments of the market, including first-time, move-up, empty-nester, active-adult, and second-home purchasers, despite being in the premium market. In both urban and suburban locations, Toll Brothers actively participates in the rental market.

The higher-end homebuilder has enjoyed a somewhat steady run of sales and profitability growth over the previous eight to ten years, benefiting from the widespread housing boom. But as mortgage rates increase from their historic lows, the once-booming housing market is faltering.

Real estate market deteriorates

Recently, mortgage rates increased from 2.9% at this time last year to above 6% for the first time since 2008. The increased rates make purchasing a home much more costly. Additionally, the market was overdue for a dip at some time because of the rapid increase in property purchases caused by the covid and low rates.

Fresh statistics released earlier this week showed that the US housing market declined in August for the seventh consecutive month. Since 2007, this was the longest streak of falling sales. The market for luxury homes is being hit particularly hard by increasing rates and concerns about an economic slump.

Weakening earnings

Toll Brothers is predicted by Zacks Equity Research to have another successful year of top- and bottom-line growth, with estimated 10% sales growth and 41% greater adjusted profitability. Sales for the company’s FY23 are predicted to decline by 9% compared to these levels, while earnings are predicted to fall by 11%.

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And unless there are some indications that mortgage rates are leveling off or declining once more, which won’t happen until the Fed eases up, Wall Street doesn’t seem ready to touch house builder stocks.

Strong support ahead

the key level to watch will be at June’s lows near 40.30 USD, and if not held, the price could deteriorate further toward 35 USD. Moreover, the bearish trend would likely be confirmed in such a scenario.

TOL daily chart, Source: Author´s analysis, tradingview.com

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