TOL Toll Brothers Inc

By Kimberly Chin 

The most affluent Americans continue to show confidence in the economy, boosting spending on new homes, designer clothing and other luxury products while shrugging off emerging threats to the long-term U.S. economic expansion.

Toll Brothers Inc., one of the nation's largest builders of high-end homes, offered fresh evidence Tuesday when it reported a 30% rise in profit in the quarter ended July 31.

The company said it expects the average price for its homes in the current fiscal year to be between $835,000 and $860,000, raising the low end of its previous guidance by $5,000. Toll Brothers' share price surged nearly 14% in Tuesday intraday trading.

Toll Brothers' strong results contrast with weakness in the broader housing market. Rising prices, higher mortgage rates and a lack of inventory have pushed many less wealthy buyers out of the market. Sales of previously owned homes fell 2.2% in June compared with a year earlier, the fifth time in six months they declined on a year-over-year basis.

Wealthier buyers are more easily able to shrug off higher mortgage rates and prices than middle-class purchasers, analysts said.

High-end retailers also have reported robust results, another sign that many wealthier Americans feel flush. Nordstrom Inc. said sales were up 7% in its most recent quarter, and Coach, which is owned by Tapestry Inc., reported a 5% increase.

Analysts expect strong results from Tiffany & Co. when it reports next week. Kering, owner of Gucci, Saint Laurent and other luxury brands, said first-half revenue in North America surged 45%.

"There's confidence in the economy," said Jack Micenko, a senior analyst at Susquehanna International Group. "People having equity in their homes is a huge confidence driver."

U.S. household net worth surpassed $100 trillion in the second quarter, thanks to rising home and stock values, according to a Federal Reserve report. Much of that is concentrated among high-end households.

Inflation is edging up, which threatens to eat into wages of all Americans. But the more affluent tend to have much of their savings in stock and other financial instruments, which have been rising in recent years. U.S. stocks are on the verge of surpassing their longest-running rally, and on Tuesday the S&P 500 stock index rose to its first intraday record since January.

This has given many wealthy consumers the confidence to spend on big- ticket items like homes, despite a number of developments that economists say could derail the long expansion. The prospect of a trade war between the U.S. and major trading partners such as China and Europe is already slowing some business spending, and rising interest rates could slow borrowing and growth.

But executives at Toll said on an analyst call that they see little evidence that rising rates are forcing their buyers to stretch financially. Buyers' loan-to-value ratio in the third quarter dropped to 67% from a more typical level of 70%. All-cash buyers jumped to 24% of all customers this year from a more typical 20%. Both of those indicate that Tolls' buyers aren't straining and taking on more debt to afford houses.

Toll's customers also were more willing to spend, putting in, on average, $165,000 toward customization and design, Chief Executive Douglas Yearley Jr. said on the investor call.

The Horsham, Pa.-based company said quarterly revenue rose 27% to $1.91 billion.

Mr. Yearley said he isn't concerned that the slowdown i n the existing-home market in California will hurt Toll Brothers in the quarters to come. He said buyers are willing to pay a bigger premium for a brand-new home than he has seen in his 28-year career.

Economist will be looking to data from the National Association of Realtors on July existing home sales on Wednesday for more clues on the market direction.

Write to Kimberly Chin at kimberly.chin@wsj.com

(END) Dow Jones Newswires

August 21, 2018 16:18 ET (20:18 GMT)

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