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Pop Goes the Bubble? Housing boom slowing - Money Matters for 11/8/05
Toll Brothers (TOL), a luxury home builder, sent a shock through the housing and stock markets today, announcing that the number of new homes planned for construction in fiscal 2006 would be lower than previously forecast. The company cited increased regulations, sliding consumer confidence and higher energy costs as the main drivers in lowering their expectations.
Traders sent the stock reeling nearly 14%. Other home builders saw similar declines, though not as severe, in the 5-10% range on fears that the housing boom may have peaked.
One statement by one firm does not normally burst a bubble or end a boom. Rather, Toll Brothers' announcement is more of a continuation in a series of economic realities that signal a serious slowdown of the once red-hot housing market.
Among the warning signs are rising interest rates for mortgages and weakness in home selling prices in some areas of the country. The housing boom, now well into its fourth year, has been a major support for the US economy, with many consumers upgrading to finer quarters, others cashing out equity to finance purchases of everything from new cars to Sunday dinner.
The end of the fabulous run for housing - in some areas, prices have nearly doubled in five years - shouldn't come as a surprise to anyone who watches such long-winded events. The market probably peaked this past summer and we are already into what hopefully will be a slow, rational descent to more rational prices for the average family home.
What is troubling to housing insiders is that Toll Brothers is a luxury firm which builds homes with an average price tag of $633,000. If the high end buyers are flinching, that kind of sentiment has a way of trickling down into the average and low ends as well, so a general slowdown may not be avoidable.
On the whole, the equity markets took the news in stride, losing only marginally on the day. Precious metals were up, as were bonds, sending yields lower for at least a time.
Dow Jones: -46.51; 10,539.72 close
NYSE Advancers: 1247
Nasdaq Advancers: 1234
NYSE New Highs: 67
Nasdaq New Highs: 81
Gold: +1.90; 462.30 close
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