For whom the bell Tolls

So Paulson was right, we've seen the bottom in the housing market with new home sales up 16% in April. However prices were down 11% indicating builders were discounting to get rid of stock. So is Paulson dreaming or is he on the ball? Difficult to say when the data is so volatile the statisticians have trouble confirming whether numbers were actually up or down for a particular month. They say we need 5 months of data before we can see a new trend emerging so it's probably wise to keep the champagne on ice for a while. Forget about house sales for a minute and let's take a look elsewhere for a clue to the health of the housing market.

How about Toll Brothers Inc. (TOL) whose 2Q07 profit plunged 79% to $0.22 a share from $1.06 per share in the previous corresponding period? The result included pre-tax land write-downs of $119.7 million, or 44 cents a share, CFO Joel Rassman added that:

"Given the uncertainty surrounding sales paces, and market direction and, thus, the potential for and size of future impairments, we are not comfortable giving full earnings guidance at this time,"

So it seems TOL doesn't share Paulson's optimism. Analyst Daniel Oppenheim of Banc of America Securities said he expects additional pre-tax land impairments of $225 million this year, based on continued declines in margins.

You can't really blame the builders for not being more forthcoming with their forecasts since the effect that tightened lending standards will have are yet to be fully felt. Whilst the company believes less than 2% of its customers used subprime loans the CEO commented that:

"the impact of stricter lending standards arising from problems in the subprime market is negatively affecting affordability at lower price points," "This, in turn, can impact the entire 'housing food chain,' including some of our potential customers' ability to sell their existing homes."

On a brighter note and lending support to Paulson's claim that the corner has been turned in the housing market Toll's cancellation rate fell to 18.9% in 2Q07 from 29.8% in 1Q07.