Toll Brothers luxury moat meets a tougher market test

There may be no better poster child for the K-shaped U.S. housing economy right now than Toll Brothers.At one end of the new-home market, builders are spending heavily on mortgage-rate buydowns and other incentives to attract payment-sensitive households just above the qualification threshold. Gross margins have compressed. Sales velocity remains below expectations for absorptions-per-community-per-week. Land, development, financing, labor, materials, tariffs, and regulatory costs continue to pressure what builders can earn on each house sold.At the other end of the spectrum sits Toll Brothers.Its average delivered and settled new home sold for approximately $996,000 in its fiscal third quarter. Its luxury move-up business accounted for 61% of home sales revenue and generated the highest margins. One-quarter of buyers paid cash. Those who financed contributed enough equity that the average loan-to-value ratio was just 69%. Options, structural upgrades and lot premiums added an average of $207,000, equivalent to 24% of Toll’s average base home price. Incentives declined to about 7.5% of gross sales price, down from roughly 8% the previous year.That operating profile is about as clos...