Market_Trends

Market Trends Catherine Bowen, and Michael Duncombe University of Phoenix ECO 365 Principles of Microeconomics Tim Price April 14, 2008 Market Trends Uncertain - indefinite, indeterminate, not clearly identified or defined (Merriam-Webster’s, 2003). Uncertain is what can be said about the market trends facing the housing industry today. From fluctuating prices, out of control cost structure, to advancements in technology and supply high while demand is low, economists are uncertain how long this housing slump will last. What is certain is how consumers will deal with these changes and how homebuilders will prepare for them. Toll Brothers has more than proven that through any economic downfall, they can prevail. This week’s paper will provide and analysis of how select market trends will or will not change for Toll Brothers and the housing industry and why. Market Structure The market structure of Toll Brothers has become monopolistically competitive. Toll Brothers in recent years has expanded from the eastern United States into more western states including Nevada and California. Toll Brothers in an effort to increase profits has expanded into other industries including mortgage services, security services, golf course management, and cable and internet services. The market has a cycle. When home sales are up, there is more incentive for new builders to jump into the construction market to get a piece of the profits. As these new builders flood the market with homes, the prices will decrease and the supply will increase as the demand stays the same. The excess homes will sit vacant, and the builders will lose profits. Builders who have not set funds aside for the down turn in the housing market, and have a large inventory of homes will be forced to close their doors. As the bad business builders are weeded out of the market, the excess supply will slowly be sold. After some time has passed the market will become good again, and then the cycle will start over. Impact of New Companies With the housing market in a slump, this has not slowed the impact that new companies have on the industry. At the present, Toll Brothers is not concerning themselves with the impact of new companies entering the market as much as they are with the imbalance of supply and demand. With the support of its subsidiary companies, such as TBI Mortgage and Westminster Title Company, Toll has been able to alleviate the pressure of rising cancellations within the industry. Toll Integrated Systems (manufacturing and material distribution operation), manufactures, assembles, and distributes numerous components on a house-by-house basis which allows the company to operate a just-in-time production system (Toll Brothers 2007 Annual Report). Toll Brothers must remain relentless in their efforts to remain in the premier homebuilder spot. Prices According to Harvard University’s Joint Center for Housing Studies, household formations for the period from 2005 to 2015 are projected to average 1.46 million per year compared to 1.26 million per year for the period from 1995 to 2005 (Toll Brothers 2007 Annual Report). This signals growth for the housing industry. Toll will be keeping a close eye on this current and growing market trend in order to stay ahead with competitive home prices for its luxury homebuyer. Technology The great thing about technology is that it is always changing. Accounting software, architecture programs, scheduling programs, and job costing programs are constantly being upgraded and changed to fit the ever changing market. As these programs advance, the users are benefiting with increased time, and larger profits. The home buyers also benefit as the home prices can become more competitive as the margin of error decreases. The trend in technology is that it always continues to grow as knowledge increases. The future holds endless possibilities for new software and tools to help the home construction industry. Productivity Toll Brothers productivity of building homes is decreasing, as more employees are fearful of losing their jobs. As wages and benefits increase with a decrease in the home market the Toll Brothers must find ways to decrease the cost of producing homes. The law of diminish marginal productivity occurs when one more input causes a decrease in output. As the wage and benefits increases the input, the output will decrease, as long as all other cost remain the same. In the current economy other cost may stay the same but other factors of the economy are affecting Toll Brothers. The decrease in the housing market will make the Toll Brothers find ways to adjust their homebuilding company. Cost Structure Cost determines the amount of profits available. Labor always seems to be one of the largest factors in cost. Construction wages are currently low as there are many skilled laborers looking for work. However, the benefit packages that go along with it are increasing. Toll Brothers offers a unique benefits package to its employees which includes a referral bonus program, discounted mortgage, home improvements and other discounts, and after two years of employment, furnished luxury guesthouses for use as vacation homes at various resort destinations around the country (Toll Brothers: Employment, Jobs, Career & Work n.d.). Health care is a large problem, and so far the U.S. has not found a suitable alternative for the rising cost. As health insurance premiums are on the rise, this is affecting business owners who in turn have to cut employees to make up the difference in benefits. The higher costs relate to higher unemployment, as not all cost can be passed on to the consumers. This seems to be the trend when benefits rise, labor must be cut. Toll in the last six months has let a third of their employees go. The organization is hopeful for an upturn in the demand of new homes. Construction materials tend to increase and decrease slightly depending on the demand. These costs seem to stay steady. Toll Brothers work with different fixed costs to keep the cost of building down (Investors Words, 2006). They work with the same subcontractors at fixed rates on each home. Price Elasticity of Demand The current market trends for the home building industry are falling. With the economic recession still on going and a slow decrease in home loan interest rates the upcoming quarters will show low and decreasing marks for home builders stocks. The current price elasticity of demand is that of the 1990’s housing bust. Due to the massive price increases seen over the last few years, and the increases in the mortgage interest rates, several of the home building companies are operating at a loss in order to salvage and continue in hopes that the recession will correct itself. The market trends are showing that the demand for new homes has plummeted and that demand will not increase for some time, until the price on homes significantly decreases or the wages of the society purchasing increases to balance the cost. This is a direct representation of the housing markets elasticity of demand; being almost perfectly inelastic, this guarantees that once the market purchaser sees they are paying too much for an item they will immediately stop purchasing. Competitors Competition between home builders is on the rise due to the oversupply and decrease in demand. These home builders are competitively trying to sell their properties in an effort to build the confidence of the buyer by offering decreased pricing, special giveaways, and more. Lennar, one of Toll Brothers’ biggest competitors, will follow along the same path as the Toll Brothers in the housing market (Toll Brothers (TOL)). Lennar has inventory that it too must move and will do whatever it takes to get it done. The slumping housing market has affected all competitors and will continue to do so until the market begins to make a rebound. Supply and Demand Analysis Presently, the supply of new homes is greater than the demand. Toll Brothers is experiencing a large amount of supply according to some analysts, they have about 13 years worth of inventory (Phillips, 2007). In an interview with D.J. Phillips, Robert Toll stated, “We continue to believe that excess supply created by cancellations, speculative buyers, and overly ambitious builders; customer concerns about selling their existing homes, and a general lack of confidence are the primary impediments to our market’s recovery.” Reaching the point of equilibrium will be a long road for Toll Brothers and other homebuilders trying to sell the inventory they have at reduced prices. Even with all the trends pointing in the direction of buying or building a new home - people are scared and not building or purchasing. The results of the analysis of demand and supply show that they are not equal, therefore, causing a surplus of homes on the market. Impact of Government Regulations With the increasing demand for more eco-friendly homes, homebuilders are under more regulations to use building materials that are harmless to the environment. Toll has already implemented features in their homes that conserve energy as well as natural resources and that reduce emissions into the environment (TollBrothers.com). The company is prepared to abide by any future government regulations within the housing industry. Conclusion Homebuilder confidence in this uncertain market has been virtually unchanged for the past few months. Builders are anticipating a time when market conditions will support an upswing in building activity - most likely in the second half of 2008 (NAHB News, 2008). Liquidity is what this housing market needs to see. On January 30, 2008, the Federal Reserve made the decision to cut short-term interest rates by half a percentage point, which is a step in the right direction according to homebuilders nationwide (NAHB News, 2008). Toll Brothers, like every other large builder, suffered the worst set back in their higher priced homes. The company continues to believe that the current market conditions will lead back to its recovery. References Investors Words (2006). Retrieved April 12, 2008 from Investors Words Web site: http://www.investorwords.com/1992fixed_cost.html. Merriam-Webster’s Collegiate Dictionary (11th ed) (2003). NAHB: Fed Rate Cut A Positive Step (2008). Retrieved on April 10, 2008, from NAHB Web site: http://www.nahb.org/news_details. Phillips, D.J. (2007). For Whom the Bells Toll: Perchance for a Home Builder' Retrieved April 9, 2008 from Seeking Alpha Web site: http://10qdetective.bolgspot.com/2007/02/for-whom-bells-toll-perchance-for-home.html. Phillips, D.J. (2007). Ongoing Slow Demand suggests Hold Off on Investment. Retrieved April 10, 2008 from Seeking Alpha Web site: http://seekingalpha.com/article/53792-toll-brothers-ongoing-slow-demand-suggests-hold-off-on-investments.html.