Changes in state and local tax deductions and the associated mortgage interest deduction that came with the tax reform bill at the end of 2017 are not affecting Toll Brothers Inc.'s sales in high-tax states like California, New Jersey and New York.
During Toll Brothers' latest earnings call, CEO Douglas Yearley said the luxury homebuilder's contracts in California were up 93% in dollars year over year. "Recall that the tax reform provisions were known in early to mid-December, but our buyers didn't seem to blink," Yearley said.
Yearley also noted that 20% of the company's customers typically pay cash for their homes, but that rate rose to 24% in the fiscal first quarter of 2018, which ran from Oct. 31, 2017, to Jan. 31.
With Toll Brothers' average customer putting a 30% down payment on homes that have an average cost of $892,000, a mortgage of $625,000 is well below the new $750,000 limit for the mortgage interest deduction provisions of the tax bill, Yearley added.
Company CFO Martin Connor said Toll Brothers netted $31.2 million as a result of the tax bill. In 2019 and beyond, Connor said he expected Toll Brothers' effective tax rate to be in the range of 26% to 27%, with the company retaining approximately 10 cents more of every dollar of pretax profit.
Yearley said that "with the economy strong, the unemployment rate low, the stock market healthy and a shortage of supply of new homes, we believe that gradually rising interest rates and a strengthening economy will not offset demand. ... As we have said many times, we would rather have a 5% mortgage rate in a booming economy than a 3.5% to 4% mortgage rate in a weak economy."