Again, the figures I am citing are pulled directly from the builders’ 8-K statements, filed with the SEC. You can assume they understate margins, but given how closely the Street has picked apart these companies’ financials over the past few years, you need to offer more than a hunch.
Gross margin at Toll Brothers in the fiscal year ended October 2005 was precisely 32.2% and this represents the peak, clearly (gross margin back in 2001 was 26.5%).
At Lennar, fiscal 2005 (Nov year end) showed a gross margin of just 16.1%, up from 14.5% in FY2001.
Toll Brothers focuses more on high-end developments, which should explain much of the difference. In terms of actual cashflows, I am guessing Toll Brothers’ margin last year was around 25%; these guys are not stupid, and it appears they have been cashflow +ive at the operating level in every one of the last 20 years.
That still suggests we have a long way to go before the various financing and upgrade incentives make a real dent in their cash earnings. It’s worth keeping in mind (here I am stating the obvious) that the $10,000 in upgrades they offer as an incentive probably cost them at most $6,000-7,000 out of pocket.
Lastly, I wouldn’t use $1m for a 3,000 sq foot home (=$333/sq ft) as a national average. That is rather ordinary for here in SoCal but would be considered fairly pricey in a lot of parts of the country away from the 2 coasts.
I don’t know what kinds of conclusions you can draw from the above examples…on a home with $1m ‘retail’ value, which gives the builder a 25% cash margin, how much debt is the builder using to finance construction, net of prepayments from the lucky buyer?
Someone smarter than me should be able to figure out the cash cost of the builder holding onto that home for an extra month while waiting for a buyer…that will get you closer to the kind of incentive they will be willing to offer and still come out ahead (or with a minimal loss).