Luxury Buyers Are Pulling Back: Tolll Brothers Sounds the Alarm on Housing

Toll Brothers’ latest quarter was supposed to be a victory lap for the luxury end of U.S. housing. Instead, the numbers landed as a reminder that even million-dollar buyers are not immune to a market stuck between high prices, sticky mortgage rates, and fading pandemic tailwinds. Fiscal Q4 EPS of $4.58 missed consensus by about 6%, even as revenue of $3.42 billion edged past expectations. The stock slipped in after-hours trading as investors looked past the respectable headline margins and focused on what management said – and implied – about demand, pricing power, and the outlook for 2026.

On the surface , the quarter was solid. Toll delivered 3,443 homes, essentially flat versus a year ago, at an average price just under $1 million. Home sales revenue grew modestly to $3.41 billion from $3.26 billion, with full-year home sales topping a record $10.8 billion on 11,292 deliveries. Operating income for the quarter was $564 million, and for the year Toll generated $1.72 billion of operating profit and $13.49 in EPS – shy of last year’s adjusted figure but still robust for a company operating in what management openly calls a “choppy environment.”

The margin story is where the hairline cracks start to show. Q4 home sales gross margin came in at 25.5%, down from 26.0% a year ago, while adjusted home sales gross margin (excluding interest and write-downs) slipped to 27.1% from 27.9%. For the full year, adjusted gross margin was 27.3%, a full percentage point below FY 2024’s 28.4%. Management is guiding to another step down in 2026, with adjusted home sales gross margin expected around 26%. That still sits comfortably above most peers, but the direction of travel is clear: between lumber and materials costs, lingering tariff pressures, and limited ability to push through higher prices, Toll is having to give up a bit of margin to keep product moving.

Demand is the other half of the equation, and here the tone was cautious. Net signed contract value in Q4 fell to $2.53 billion from $2.66 billion a year earlier, and contracted homes dropped to 2,598 from 2,658. Deliveries once again ran ahead of orders, meaning Toll is still drawing down its pipeline rather than growing it. Backlog value is now $5.5 billion versus $6.5 billion a year ago, with homes in backlog down to 4,647 from 5,996. Management didn’t sugarcoat it, acknowledging “soft demand across many markets” and a housing backdrop that remains unfavorable in several regions as high monthly payments keep marginal buyers on the sidelines.

Promotional activity and pricing pressure are an uncomfortable reality across the builder landscape, and Toll isn’t entirely insulated just because its average buyer has a higher FICO score. The average price of homes in backlog has risen to roughly $1.18 million, but that’s largely a mix story as the company leans further into ultra-luxury communities – particularly in the Pacific region, where average selling prices top $2 million. On a like-for-like basis, pricing power is under pressure, which shows up in the modest margin compression and in a rising cancellation rate: 8.3% of signed contracts in Q4, up from 5.9% a year ago. Management emphasized that it is “balancing price and pace,” actively managing spec inventory and community-level incentives to avoid broad discounting, but the message between the lines is that you have to sharpen the pencil to keep absorption rates acceptable.

The guidance reinforces that 2026 is more about navigating through the cycle than blasting into a new housing upturn. For the first quarter, Toll expects 1,800–1,900 deliveries at an average price just under $1 million, with an adjusted gross margin of 26.25% and notably higher SG&A as a share of revenue – a reminder that fixed costs bite harder when volume is only grinding higher. For the full year, management is calling for 10,300–10,700 deliveries at an average price of $970,000–$990,000 and a 26% adjusted gross margin. Community count is set to rise 8–10%, which should position the company for growth when demand recovers, but in the near term it means more lots to carry in a sluggish market.

If there is a clear bright spot, it is the balance sheet and capital allocation story. Toll ended the year with $1.26 billion of cash, a net debt-to-capital ratio around 15%, and another $2.19 billion available on its revolver. It repurchased 5.4 million shares in FY 2025 for $652 million, shrinking the share count by roughly 5%, and continues to pay a modest dividend. The sale of roughly half its Apartment Living portfolio to Kennedy Wilson, with an eventual exit from multifamily development, further simplifies the business and frees up capital for core homebuilding and buybacks. In other words, even if fundamentals stay soft, Toll has the financial flexibility to play offense.

For the broader housing and equity markets, Toll’s quarter reads as a micro version of the macro story. The sector is not collapsing, but it is grinding through an extended adjustment where high prices, sticky borrowing costs, and an oversupplied Sun Belt are forcing builders to work harder for every dollar of profit. Margins are compressing from very elevated levels, backlogs are easing, and incentives are quietly doing more of the heavy lifting. Toll’s luxury positioning and national footprint make it one of the more defensive ways to play the space, but its own commentary makes it clear that a true housing upturn is more a 2027 conversation than a 2026 base case. Until then, investors should expect more of the same: solid execution, disciplined capital returns, and a housing market that stubbornly refuses to declare a clean bottom.