By Arunima Banerjee and Yashaswini Swamynathan
(Reuters) - Toll Brothers Inc's (N:TOL) falling average selling price (ASP) signals a new normal for luxury homebuilders in the United States as they sell more, but lower-priced homes, to thrifty millennials.
Toll reported its third straight quarter of ASP declines on Tuesday and forecast its first annual drop in home prices in seven years.
"We have to work harder to sell larger units at higher price points although we are not competing in the super tall or super expensive condominium product," Toll CEO Douglas Yearley said, talking about the company's City Living Urban condominium unit.
Toll, which typically makes homes that cost nearly $1 million, introduced a range of homes starting from $330,000 earlier this year, aimed at young and affluent first-time buyers. The cheapest Toll home costs upward of $200,000.
"The biggest opportunity right now is in the more affordable market where perhaps margins are little bit smaller but there is extraordinary demand," said Aaron Terrazas, senior economist at online real estate marketplace Zillow.
Nearly a quarter of Toll's orders this year were from millennial households where one buyer was 35 years of age or younger.
Toll's predicament is indicative of the changing mindset of millennials, who are fiscally prudent, and either want to buy cheaper homes, or rent.
"What we have seen is that some life events such as getting married and having children - a lot of millennials are postponing some of those and ... want to stay close to the city so their are looking for more affordable products," said Robert Rulla, a director at Fitch Ratings.
Homebuilders including D.R. Horton Inc (N:DHI), the country's biggest, and Meritage Homes Corp (N:MTH) have also introduced cheaper homes in the past few years.
VOLUME GAME
Toll's third-quarter ASP fell 6 percent fell but volumes rose 26 percent. The company expects ASP to range between $800,000 to $825,000 in the fiscal year ending October, down from $847,700, a year earlier, and volumes to rise 15 percent to 20 percent.
The trend of homebuilders selling more lower-priced homes is likely to continue in the near future even as average prices of new homes in the United States touch record highs, industry experts said.
The median price for new homes sold rose to $316,200 in 2016 from $246,500 in 2006, according to the U.S. Census Bureau.
Lower-priced homes come with smaller margins, but have quicker delivery times because they are easier to build.
"I think most homebuilders are going to take a hit on the margins and sell lower priced homes. It is going to be a volume game going forward," said Tania Onbek, owner of Connecticut-based mortgage broker On Deck Mortgage Services.
"Millennials are now thinking twice before splurging on buying a plush home ... and investors in the homebuilding industry should get used to this."