Toll Bros. not in a luxury position

A Toll Bros. sign at a construction site

KAI RYSSDAL: We're used to hearing bad news from homebuilders. Fallout from the troubled subprime mortgage market has made it harder for would-be buyers to get loans. Others are hoping to wait out the Fed for a rate cut. So it wasn't entirely surprising today when Toll Brothers warned it won't meet its earnings target for the year.

Toll Brothers builds luxury homes, though. It's customers aren't high-risk borrowers or first-time buyers. But Marketplace's Amy Scott reports even the wealthy are starting to feel some pain.


AMY SCOTT: Toll Brothers still expects to turn a profit for the second quarter. But it says new contracts fell by 14 percent from a year ago. And the value of its total contracts fell by 25 percent.

The company blamed a lack of buyer confidence and the tighter lending requirements ve put in place after mortgage defaults began to soar.

Analyst Greg Gieber with A.G. Edwards says the effects of the lending crunch have reached all the way up to the top-end buyers. They're canceling contracts for new houses because they can't sell the old ones.

GREG GIEBER: Probably the person buying their house is gonna be somebody who's also moving up from an existing house and they'll have to sell. So you have this sort of chain that goes on. At the bottom end are first-time buyers. And they are the ones that will have trouble getting credit.

Luxury homebuilders are taking another hit from the exodus of speculators who helped drive prices up during the real estate boom.

Kevin Harris is chief economist at Informa Global Markets. He says builders like Toll Bros. had profited from all the speculation.KEVIN HARRIS: People who wanted to make a lot of money in the real estate market knew they could do best at the high end, because that's where prices were highest. As speculation slows down, that market is slowing down.Harris predicts the market will get worse before it gets better, as more lenders tighten their mortgage standards through the summer. For example, if customers say they make $60,000 pre-tax, bankers will now ask them to prove it. Harris says believe it or not, even some big-name lenders weren't doing that.

In New York, Ia€™m Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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