Struggling upscale homebuilder Toll Brothers (TOL) saw its homebuilding revenue fall 34% for the third quarter, but CEO Robert Toll is sounding an optimistic note, telling shareholders that "Although the rate of cancellations as a percentage of our backlog remained quite elevated compared to our historical standards, total cancellations during the third quarter of 195 were the lowest quarterly total in over two years. We believe this reduction in cancellations is a positive sign."

So people are somewhat less likely to renege on agreements to purchase homes. Cancellations dropped from 23.8% to 19.4%.

Key to Toll’s theory about an upcoming rebound for homebuilders is the notion that the rapid decline in new construction in sales of late is leading to pent-up demand: people postponing home purchases for a few years and next year, by golly, they’ll be ready to buy that new house!

I’m not so sure about that. It just seems little optimistic, and a little simplistic: are people really dying to buy the new homes that they’ve watched tank in value over the past few years? In an interview on CNBC, worth watching if you follow the homebuilders, Mr. Toll suggested that the aggressive discounting homebuilders have already done has made them better positioned for 2009, compared with "used homes", where sellers have been reluctant to lower prices.

But here’s the thing: if prices on existing homes continue to fall, that has to effect demand for new construction. Won’t be people think twice about buying a new home when they get homes that are a few years old for a lot less money? As the spread between the price on new homes and old homes increases, you have to think consumers will be more interested in old ones.

For what it’s worth, Mr. Toll has not established a track record as being much of a realist on housing. He called the current market a "housing depression" during the CNBC interview but, as recently as November of 2007, he was content to blame the weak housing market on the media.

I’m reluctant to put too much stock in any forward-looking statements he makes, and I think investors should be as well.

Zac Bissonnette

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