Persistently high mortgage rates and inflation are challenging the homebuilding industry. Luxury homebuilder Toll Brothers (TOL, Financial) reported disappointing first-quarter 2025 results and provided soft guidance for second-quarter deliveries, estimating 2,500-2,700 units. The spring selling season has had a mixed start, though there has been a modest increase in sales activity recently. Despite this, CEO Douglas Yearley's comments have not alleviated shareholder concerns about a potential downturn in new home construction.

- As a high-end homebuilder, Toll Brothers is somewhat shielded from rising mortgage rates, with 26% of buyers paying in cash. However, affordability issues are prompting homebuilders to offer competitive incentives, pressuring margins and profits.

- In Q1, Toll Brothers' adjusted home sales gross margin dropped by 200 basis points year-over-year to 26.9%, though it exceeded guidance of 26.25%. This margin decline, along with $22.6 million in impairment charges, contributed to a 22% year-over-year decrease in EPS to $1.75. Core homebuilding operations met expectations, according to Yearley.

- Deliveries rose 3% to 1,991, aligning with the lower end of the guidance range of 1,900-2,100 units. More concerning is the Q2 delivery guidance of 2,500-2,700 units, indicating a year-over-year decline of about 1.5% at the midpoint and falling short of analysts' expectations, suggesting a lackluster spring season.

- Tariffs add uncertainty, potentially increasing building materials costs and squeezing margins. Toll Brothers has not yet felt tariff impacts and reaffirmed its fiscal year 2025 adjusted home sales gross margin guidance of 27.25%.

- Despite current challenges, Toll Brothers remains bullish on the long-term outlook for the new home market, especially in luxury and move-up segments. Favorable demographics, a chronic undersupply of homes in the U.S., and accumulated wealth from home price appreciation and stock market gains support this optimism.

The main takeaway is that high mortgage rates are affecting the spring season for new home construction, and Toll Brothers is not fully immune to these challenges. Tariffs could further pressure margins and profits, adding to the industry's uncertainties.