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Persistently high mortgage rates and inflationary pressures have left the homebuilding industry on shaky ground. Against this challenging backdrop, luxury homebuilder Toll Brothers (TOL) delivered disappointing 1Q25 results and issued soft 2Q25 deliveries guidance of 2,500-2,700 units, commenting that the key spring selling season is off to a mixed start. On a brighter note, the company has seen a modest pickup in sales activity over the past week. However, that anecdote from CEO Douglas Yearley wasn't enough to reassure nervous shareholders who are becoming increasing concerned that a deeper downturn in the new home construction market may be brewing.

• As a high-end homebuilder, TOL is relatively more insulated from the effects of higher mortgage rates -- about 26% of its buyers pay all cash -- but this issue has increasingly become a problem for the company. Affordability constraints are causing a ripple effect across the market, causing homebuilders to match each other's incentives and offers. In turn, this is putting downward pressure on homebuilding margins and profits.
• In Q1, TOL's adjusted home sales gross margin slipped by 200 bps yr/yr to 26.9%, although that figure did beat its guidance of 26.25%. The decline in margins was partly responsible for EPS falling by 22% yr/yr to $1.75, but impairment charges totaling $22.6 mln were also to blame. In fact, Mr. Yearley stated that its core homebuilding operations were in-line with expectations.
• Deliveries increased 3% to 1,991, which is towards the lower end of its guidance range of 1,900-2,100 units. The bigger issue, though, is TOL's Q2 deliveries guidance of 2,500-2,700 units, equating to a projected yr/yr decline of about 1.5% at the midpoint of the range. The outlook was also below analysts' expectations, signaling that the crucial spring season may fall flat this year. 
• Tariffs are adding another layer of uncertainty to the market, creating some concern that higher building materials prices will further pressure margins. With that said, TOL has not experienced any immediate impacts from tariffs up to this point, and the company did reaffirm its FY25 adjusted home sales gross margin guidance of 27.25%. 
• Lastly, TOL continues to hold a bullish view on the long-term outlook for the new home market -- particularly for the luxury and move-up niches. Positive factors working in its favor include favorable demographics, the chronic undersupply of available homes in the U.S., and the accumulated wealth built up from home price appreciation and stock market gains.

The main takeaway is that high mortgage rates are dampening the spring season for the new home construction market and TOL is not completely immune to these headwinds. The implementation of tariffs could squeeze margins and profits even harder, casting another cloud over the homebuilder industry.