What happened

After two days of non-stop selling, markets finally caught a break this morning, and the S&P 500 is back up 1.1% in pre-noon trading. Not everyone's so lucky, however. Last night, homebuilder Toll Brothers (NYSE:TOL) reported its first-quarter 2020 numbers, and its stock is down 13.4% as of 11:50 a.m. in response.

What went wrong?  

Construction workers review blueprint plans in front of a home under construction

Image source: Getty Images.

So what

Toll Brothers earned $0.41 per share in Q1 2020, down 46% from Q1 2019 and below the $0.45 per share Wall Street analysts had predicted. Sales for the quarter -- $1.33 billion -- likewise fell short of expectations. Analysts had predicted that Toll's sales would rise this year, but in fact they fell, down 2% year over year.  

Surprisingly given the revenue decline, Toll Brothers reported that home-building "deliveries" were actually up 5% year over year. Yet CEO Douglas Yearley noted that Toll has been in a "challenging sales environment" since late 2019, which is depressing gross margins and hurting both sales and profits.

Now what

Things may be looking up. Yearley noted that Toll inked contracts calculated to result in 28% greater revenues in Q1. Still, this number reflects weaker pricing power on homes being sold. Unit contract growth was up 31%. Management predicted that it will deliver between 1,850 and 2,050 houses in the second quarter of 2020, and between 8,600 and 9,100 houses in all of 2020. But the average price of these homes -- between $800,000 and $820,000 -- will be below the $843,500 average price of homes in Toll Brothers backlog in Q1, and far below the $901,400 average price of backlogged homes in Q1 2019.

Long story short, the National Association of Realtors says home sales growth is strongest "in the $500,000 to $750,000 price range," and that's not great news for a company that specializes in selling near-$1 million homes.