One can’t help but wonder if the recent near 7% drop in the price of Toll Brothers’ stock is a sign of the coming slowdown in the housing sector.

Although revenue estimates were missed by $.04 per share, the company did provide an overall positive performance:

  1. Q2 deliveries were nearly 1,900 units, an increase of 15% from one year ago
  2. Q3 deliveries are projected to be between 2,100 and 2,200 units
  3. Average price ranges are expected to slightly increase from between $830,000 – $850,000 in Q3 to FY2018 unit deliveries of 8,000 – 8,500 at a price range of $830,000 – $860,000

These impressive results aside, one big red flag in Toll Brothers’ performance is the nearly 50% increase in the Q2 buyer cancellation rate of 5.2%, up from 3.5% one year ago.

Unlike mass market homebuilders such as D.R. Horton and Lennar – whose stock prices dropped between 1% and 2% – Toll Brothers builds homes that can cost nearly $2 million.

Higher housing prices combined with increasing construction costs, rising interest and mortgage rates, and the impact of the new tax law on mortgage interest and local and state tax deductions combine to create the perfect storm for declining new home sales going forward.

In fact, the Commerce Department reported the first year-on-year drop in the sales of new homes in the first five months of the year. The growth in home sales is expected to continue easing as interest rates rise.