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Fed Rate Cuts and Faster Builds: A Turning Point for Toll Brothers?
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Key Takeaways
Toll Brothers' Q3 results show lower contracts, a smaller backlog and pressured margins.
The Fed's 25 bps cut could ease affordability and attract more buyers back to the market.
35% of Toll communities can now deliver homes in eight months or less, boosting flexibility.
Toll Brothers, Inc. (TOL - Free Report) continues to face challenges from affordability pressures. Elevated mortgage rates and higher construction costs have weighed on buyer sentiment, slowing activity across many regions. For luxury-focused builders, the ability of buyers to commit at higher prices has become more uncertain, with affordability remaining a key headwind.
In the third quarter of fiscal 2025, Toll Brothers’ results reflected this strain. Net signed contracts fell 4% year over year in units, showing pressure from elevated borrowing costs. Backlog also declined 19% year over year in units and 10% in potential revenues, signaling softer visibility ahead. Also, the company reported an adjusted home sales gross margin of 27.5%, down 130 basis points (bps) from the prior year. While average selling prices remained resilient, higher incentives and a slower sales pace added pressure to profitability.
However, a shift in monetary policy could provide some relief. The Federal Reserve recently cut its benchmark rate by 25 bps, setting the target range at 4% to 4.25%. It was the first reduction since last December, with two additional cuts signaled for later this year. Lower financing costs may ease affordability constraints and encourage more buyers to return to the market.
Furthermore, Toll Brothers has made progress in reducing build times. About 35% of its communities can now deliver homes in eight months or less compared with longer cycle times of up to 11 months in more complex projects. Faster cycle times, supported by its growing spec-home strategy, give the company greater flexibility to meet demand. If rate cuts bring more buyers off the sidelines, shorter builds could allow Toll Brothers to convert interest into closings more efficiently, potentially marking a turning point after recent volume pressures.
Fed Rate Cuts Could Support Other Homebuilders
High mortgage rates and affordability pressures have slowed sales volumes across the housing sector. Homebuilders such as Lennar Corporation (LEN - Free Report) and D.R. Horton, Inc. (DHI - Free Report) have both faced softer order trends, highlighting the impact of higher borrowing costs on buyers. However, the Federal Reserve’s recent rate cut could provide some relief, offering builders a chance to stabilize demand.
Lennar has leaned on price incentives and mortgage buydowns to sustain sales volumes, but this has weighed on margins. In the fiscal second quarter of 2025, gross margins slipped to 18%, down from 22.5% a year ago. However, an asset-light land strategy remains a key tailwind. By shifting from land ownership to land control through third-party land banks, Lennar has reduced capital intensity, improved returns and strengthened its balance sheet. This approach provides flexibility to scale operations more efficiently through housing cycles.
D.R. Horton has also faced slower volumes, with 81% of buyers in the third quarter of fiscal 2025 relying on incentive programs. While this pressured profitability, the company continues to benefit from its lot acquisition strategy and efforts to enhance capital efficiency. Strong liquidity and a flexible lot supply position it to support growth, even in a softer demand backdrop.
TOL’s Price Performance, Valuation and Estimates
Toll Brothers’ shares have gained 24.2% in the past three months, outperforming the Zacks Building Products - Home Builders industry, broader Zacks Construction sector and S&P 500, as shown below.
TOL Price Performance
Image Source: Zacks Investment Research
In terms of its forward 12-month price-to-earnings ratio, TOL stock is trading at 10.24, down from the industry’s 12.33.
P/E (F12M)
Image Source: Zacks Investment Research
Over the past 30 days, the Zacks Consensus Estimate for TOL’s 2025 earnings per share has decreased to $13.82 from $13.99. The estimated figure indicates a 7.9% decline from the year-ago profit level.
Image: Bigstock
Fed Rate Cuts and Faster Builds: A Turning Point for Toll Brothers?
Key Takeaways
Toll Brothers, Inc. (TOL - Free Report) continues to face challenges from affordability pressures. Elevated mortgage rates and higher construction costs have weighed on buyer sentiment, slowing activity across many regions. For luxury-focused builders, the ability of buyers to commit at higher prices has become more uncertain, with affordability remaining a key headwind.
In the third quarter of fiscal 2025, Toll Brothers’ results reflected this strain. Net signed contracts fell 4% year over year in units, showing pressure from elevated borrowing costs. Backlog also declined 19% year over year in units and 10% in potential revenues, signaling softer visibility ahead. Also, the company reported an adjusted home sales gross margin of 27.5%, down 130 basis points (bps) from the prior year. While average selling prices remained resilient, higher incentives and a slower sales pace added pressure to profitability.
However, a shift in monetary policy could provide some relief. The Federal Reserve recently cut its benchmark rate by 25 bps, setting the target range at 4% to 4.25%. It was the first reduction since last December, with two additional cuts signaled for later this year. Lower financing costs may ease affordability constraints and encourage more buyers to return to the market.
Furthermore, Toll Brothers has made progress in reducing build times. About 35% of its communities can now deliver homes in eight months or less compared with longer cycle times of up to 11 months in more complex projects. Faster cycle times, supported by its growing spec-home strategy, give the company greater flexibility to meet demand. If rate cuts bring more buyers off the sidelines, shorter builds could allow Toll Brothers to convert interest into closings more efficiently, potentially marking a turning point after recent volume pressures.
Fed Rate Cuts Could Support Other Homebuilders
High mortgage rates and affordability pressures have slowed sales volumes across the housing sector. Homebuilders such as Lennar Corporation (LEN - Free Report) and D.R. Horton, Inc. (DHI - Free Report) have both faced softer order trends, highlighting the impact of higher borrowing costs on buyers. However, the Federal Reserve’s recent rate cut could provide some relief, offering builders a chance to stabilize demand.
Lennar has leaned on price incentives and mortgage buydowns to sustain sales volumes, but this has weighed on margins. In the fiscal second quarter of 2025, gross margins slipped to 18%, down from 22.5% a year ago. However, an asset-light land strategy remains a key tailwind. By shifting from land ownership to land control through third-party land banks, Lennar has reduced capital intensity, improved returns and strengthened its balance sheet. This approach provides flexibility to scale operations more efficiently through housing cycles.
D.R. Horton has also faced slower volumes, with 81% of buyers in the third quarter of fiscal 2025 relying on incentive programs. While this pressured profitability, the company continues to benefit from its lot acquisition strategy and efforts to enhance capital efficiency. Strong liquidity and a flexible lot supply position it to support growth, even in a softer demand backdrop.
TOL’s Price Performance, Valuation and Estimates
Toll Brothers’ shares have gained 24.2% in the past three months, outperforming the Zacks Building Products - Home Builders industry, broader Zacks Construction sector and S&P 500, as shown below.
TOL Price Performance
Image Source: Zacks Investment Research
In terms of its forward 12-month price-to-earnings ratio, TOL stock is trading at 10.24, down from the industry’s 12.33.
P/E (F12M)
Image Source: Zacks Investment Research
Over the past 30 days, the Zacks Consensus Estimate for TOL’s 2025 earnings per share has decreased to $13.82 from $13.99. The estimated figure indicates a 7.9% decline from the year-ago profit level.
Image Source: Zacks Investment Research
Toll Brothers currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.