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Toll Brothers' stock is having a good year. The reason lies in who buys its homes.

Toll Brothers’ stock (TOL) is having a good year despite uncertainty over when the Federal Reserve will cut rates. One major factor is the homebuilder's luxury positioning in the market.

Toll stock was up nearly 9% year to date as of mid-morning Friday. That’s higher than the SPDR S&P Homebuilders ETF’s (XHB) 6% gain. Meanwhile, D.R. Horton (DHI), the biggest player in the space, is down more than 3% so far this year.

One of the biggest advantages Toll has over its competitors is a relatively affluent base of buyers who are less affected by mortgage rate volatility, according to analysts.


The company, which bills itself as America's luxury homebuilder, said in its most recent quarterly results that 25% of buyers paid all cash for its homes, which had an average price tag of over $1 million.

“We think Toll is benefiting somewhat from a wealth effect,” Rafe Jadrosich, US homebuilders and building products analyst at Bank of America, told Yahoo Finance. “So their demand is more tied to household wealth, which has gone up with the stock market rising.”

Ana Garcia, an analyst from CFRA Research, agreed: "We view [Toll Brothers'] target consumer as lifting TOL’s performance when compared to peers,” she said in an email. “We think that luxury consumers are less influenced by what rates are doing as they tend to be better capitalized which provides them more options to offset rate headwinds.”

Toll reported a 40% gain in orders year over year in its fiscal first quarter ending Jan. 31 and raised its guidance for home deliveries for the full year.

“When looking at the most recent reporting quarter, we see that on a two-year lookback period, we see home closing volumes flat for TOL whereas homebuilders with more exposure to entry level consumers, i.e. consumers with less access to capital, have seen double digit declines in home closings,” Garcia said. “Additionally, average selling prices for TOL have jumped 14.5% whereas peers have come in below that and some have been negative.”

BETHESDA, MD-DECEMBER 20:Construction at Silver Linden and Windflower Way in the Amalyn community on December 20, 2022 in Bethesda Maryland. (Photo by Benjamin C Tankersley/For The Washington Post via Getty Images)
onstruction at Silver Linden and Windflower Way in the Amalyn community on Dec. 20, 2022, in Bethesda, Md. (Benjamin C Tankersley/Washington Post via Getty Images) (The Washington Post via Getty Images)

She added that Toll's gross margins over that two-year period have also outperformed peers who are more exposed to first-time homebuyers.

Toll has also been less reliant than others on incentives known as mortgage rate buydowns, where builders cover a portion of the interest rate buyers pay on a loan. Wall Street is concerned the practice hurts builder profit margins.

“While mortgage rate buydowns are heavily marketed and offered nationwide, very few of our buyers use incentive dollars to buy down their rates,” Toll Brothers CEO Doug Yearley said on the earnings call Wednesday to analysts. “The vast majority of our customers can qualify for a market rate mortgage without a buydown, and they prefer to use any incentive offered on design studio upgrades or to reduce their closing cost.”

The comments come after two of the biggest US homebuilders indicated this earnings season they wouldn't pull back on the incentive.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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