As much of the housing market stalls under the weight of high prices and steep mortgage rates, luxury homebuilder Toll Brothers is leaning on its affluent buyers to weather the storm.
Though the economic climate has shifted drastically since the pandemic housing boom, Toll Brothers' high-end clientele continues to show up — with cash in hand. Roughly 26% of the company's buyers in the first quarter of the year paid entirely in cash, a striking contrast to the broader market where affordability is keeping many would-be buyers on the sidelines.
Why the Wealthy Are Still Buying
Toll Brothers CEO and chairman Douglas Yearley credits the company's resilient performance to its unique customer base. "Demand for our homes continues to be supported by our affluent customer base," he said on the company's earnings call. "Over 70% of our business is luxury move-up and empty nester, which serves a wealthy cohort that has benefited from years of home price and stock market appreciation."
The remaining quarter to one-third of the company's customers are high-earning first-time buyers, often older millennials who are entering the housing market later in life with stronger financial footing. These buyers are not as sensitive to mortgage rate fluctuations, either because they have the cash or they're drawing equity from previously owned homes that saw significant appreciation in recent years.
The average loan-to-value ratio for Toll Brothers buyers with a mortgage is about 68%, indicating these buyers are putting down substantially larger down payments than the typical American.
Builders Hold the Advantage
Newly constructed homes have been outperforming existing homes in the current market cycle — and for good reason. Builders like Toll Brothers can offer smaller homes, incentives like mortgage rate buydowns, and design upgrades that help offset affordability concerns. Meanwhile, the existing home market remains tight, as homeowners cling to ultra-low mortgage rates and delay selling — a phenomenon known as the "lock-in effect."
Despite these advantages, Toll Brothers has not been immune to market pressures. Affordability challenges did affect some lower-priced markets, according to Yearley. Still, demand in places like California remained strong, underscoring the strength of the builder's luxury niche.
Solid Core Business, Despite Disappointments
While Toll Brothers' core homebuilding business met expectations in the first quarter, the company missed Wall Street estimates on net income and earnings per share. Yearley attributed the shortfall to a delay in the sale of a stabilized apartment and some impairments — not core business weakness.
In the quarter, Toll Brothers delivered 1,991 homes with an average price of $925,000, resulting in $1.84 billion in home sales revenue. The company also signed 2,307 net contracts worth $2.31 billion — a year-over-year increase in both units and dollars. Toll Brothers says it has the land it needs to support future development.
Still, investors reacted cautiously. The company's stock dropped nearly 6% on the earnings report, highlighting the market's sensitivity to even minor earnings misses.
Looking Ahead
Despite the earnings dip, Toll Brothers remains confident. Yearley emphasized the long-term strength of the new home market, particularly in the luxury segment. As affordability pressures continue to squeeze average buyers, Toll Brothers is finding steady ground with its wealthy customer base and adaptable building strategies.
In a housing market riddled with uncertainty, it turns out that cash is still king — and luxury is far from out of style.
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