Toll builds to suit in most of its communities, thus putting itself in a position of carrying low amounts of inventory unlike virtually all other national builders. You don’t have to give huge incentives to move a house that hasn’t been built yet because you are giving the buyer choice!
This is an interesting observation. Letâ€™s say the reader is right and Toll Brothers doesnâ€™t build spec houses; all the houses are custom built to order and it faces very few cancellations. Would this practice put breaks on price declines? No! Toll Brothers competes against a small army of homebuilders that are facing cancellations of already built houses. A flood of new homes and a drop of demand caused by a cooling down of the housing market created a significant pressure on house prices. And though Toll Brothers did not cause the price declines (as the reader argues) its future to-be-built houses will be facing competition from lower priced, already built and/or to-be-built houses from struggling competitors. If other builders give incentives or lower prices to keep selling their houses, unless Toll Brothers have something very unique about their houses (i.e. premium waterfront lots, much better quality etc..) it will have to lower the prices to be competitive.
Toll Brothers may decide to abstain from selling houses at lower prices. It then will sell a lot fewer houses and its earning will still suffer. Unfortunately for Toll Brothers, industry structure is a function of actions of all competitors, not just the stronger, wiser ones (as the reader argues). Weaker, less disciplined competitors can destroy value for the whole industry, theyâ€™ve done it many times in the past and will do it again.
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