October 25, 2005
Notes from NY Times Magazine (10/16/05) article about the housing market, and specifically Toll Brothers, Inc. (TOL)(37.70)
1) Corporate culture was discussed with a philosophy of frugality (i.e. furniture from bk company, modest offices, ac on the blink). I write this because I like investing in companies that watch all costs and are not corporate frivolous.
2) Robert Toll concedes that certain markets are “frothy” like Alan Greenspan says. he agrees that mortgage business needs to stop pushing interest only loans. He predicted that “investors will get creamed” in certain metro markets. Yet, doesn’t expect a crash.
3) Toll controls enough land for 80,000 houses. Mentions that competitors have larger accumulations.
4) Builders are optimistic by nature.
5) The article mentions that there are currently 34M rented apartments and 74M owner occupied homes in the US.
6) Since 1990 there have been 13.5M homes constructed in US. Last year the starts were about 1.6M, a new record. Chief economist for National Association of Home Builders, projects record builds in 2005 and 1.58M in 2006.
7) Toll mentioned that finding land was difficult and this is where TOL becomes successful, because of their expertise.
8) TOL looks to grow 20% over next two years, and then 15% after that. As I write this, I wonder if they ever consider growing at the same rate as GDP, which is historically in the 3.50% range. The article mentions that based on these rates the expected production of 8600 houses this year, will expand to 15,000 houses by 2010.
9) Mentions Robert Shiller from Yale pointing out that housing starts could drop if the consumer lost their “irrationally exuberant” conviction. He feels this exuberance is unjustified by historical standards. He also mentions the pain that could be felt if potential homebuyers no longer want to spend gas money driving 50 miles one way to work.
10) Current reserves said to be enough for 6 or 7 years.
11) New Jersey is the place that predicts the future of American housing. Claims that New Jersey’s density is currently 1,165 people per square mile. Claims that India’s ratio is 914 and Japan at 835.
12) Seems fairly conclusive that all economists seem to think that high home prices are attributed to “zoning.” Price increases over the last decade, seem to be in line with degree of zoning ordinances. There was mention that steep appreciation rates, might make some places reconfigure their zoning to allow more housing supply, which in turn could relieve pressure on housing prices.
13) Even after 15 years of declining prices in Japan, it is still more expensive to live in Japan than Manhattan. According to the article, there is no natural law stating that prices must come down.
14) Toll Brother’s says, call it an “estate home”, I say, “don’t call the McMansions, McMansions.”