Toll Brothers’s Joel Rassman

Toll Brothers's Joel Rassman on the relationship between the housing slowdown and the public's faith in government.

The recent downturn in housing has potentially
wide-ranging implications for the U.S. economy. To get some
perspective on where this bellwether industry is headed, CFO turned to
Joel Rassman, CFO of Toll Brothers, a publicly traded builder of
luxury homes in 50 markets around the country. While Rassman declines
to make firm predictions about where the housing market is going,
he notes that much depends on consumer confidence — which he believes
won’t improve without a change in the nation’s political direction.
If Rassman is right, CFOs in other industries might want to keep a close
eye on the outcome of this month’s congressional elections.

How bad is the housing slump going to get, and how long will it last?

No one can tell for sure. Every slowdown is unique.
We’ve seen slowdowns last anywhere from a few months
to three years. But I think the average has probably been
a year and a half, give or take.

What’s your best guess as to this particular cycle?

The first market to show slowness was the Washington,
D.C., area, mostly in Virginia, which slowed about the
time of Hurricane Katrina last year and continued until
a month or so ago. It now seems to be showing signs of
stabilizing, or even improving. It’s a little early to tell, but
if that’s what’s happening, and if Virginia is a reliable
indicator, maybe six months from now, if not earlier,
we’ll see it turn positive. That would suggest a downturn
that’s close to the average of a year and a half.

What would indicate the start of a recovery?

You’ll see incentives slowly but surely disappear. And
when that happens, you’ll see some consumers coming
back into the market thinking that maybe they missed
the bottom and that they’d better get in before it’s too
late. And it builds from there. There is even the potential
for a significant shortage of housing, because in
many markets it takes anywhere from two to five years
to get approvals for development.

Do you think this downturn will be longer than usual?

I think this is a different slowdown in that it wasn’t started
by the macroeconomic forces that typically start
one — high interest rates, job losses, or a slow economy.
Instead, it was started by significant oversupply, created
by speculators and builders who built units on spec. Those speculators who
then put those units on the market were reducing demand at the same time,
because they were no longer buying new units and increasing
supply. So that was a double whammy in terms of supply
and demand.

Didn’t the Fed’s interest-rate increases have an effect?

Exclusive of about a year’s period of time when they were
lower, mortgage rates are about as low as they’ve been.
It’s still a good time in that respect to buy a house.


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