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Dear Mr. Berko:

Dear E.W.:

Robert “Little Daddy” Toll didn’t sell all of his stock; he only sold 4.4 million shares for about $86 million. He and his brood still own 14 percent of the company founded by Big Daddy in 1968. Little Daddy is 68 years old, and I think he suspects that the price of Toll Brothers (TOL – $21.14) may have moved too high too quickly and doesn’t deserve this multiple.

However, TOL probably has the strongest balance sheet in the homebuilding sector, a book value of $19 a share, over $2 billion in cash and debt that is only 38 percent of capital. TOL is a strong company, darn well managed, and the Tolls may be among the wisest people in the business. When wise people sell 4.4 million shares of their company stock, you can safely wager fists full of hundred-dollar bills to a barrel of pennies that Little Daddy Toll sees what’s on the horizon more clearly than the investors who moved his stock from a low of $13 up to $23.

Although I deeply respect Ben “Gentle Ben” Bernanke, I’m not as sanguine as he that the recession is kaput. I’m taking comfort in my worry beads and praying that he’s right. Still, there’s an elephant in the room.

The recession may be over, but as unemployment continues to increase, fewer and fewer consumers can afford to own a TOL home. And frankly, fewer and fewer consumers can afford to own a Horton, a Pulte, a Ryland, a Hovanian, a Beazer, a Standard Pacific or a Lennar home. The reasons are not the record number of foreclosures, the huge number of existing homes for sale or the unwillingness of banks to issue new mortgages. I think Little Daddy thinks that consumer income has been flat for the last eight years, and that the consumer lacks the income to purchase a new home.

I think Little Daddy is as right as nine pence and trivet. With a solid 10 percent of the work force unemployed, and many who are employed making less than they did four years ago, new home sales don’t appear appealing.

Fewer working consumers translate to lower corporate revenues. Corporations will continue to cut costs and reduce employment. That translates to lower personal earnings and/or more job losses. So banks are reluctant to lend, and the few consumers who can afford a $300,000 home are reluctant to buy, fearing they may be downsized.

Those green shoots everyone has been talking about need a lot more water, fertilizer and sun. The recession might be over, but that doesn’t mean everybody will be employed again by year’s end, that corporate revenues will return to their 2004 levels or that your Individual Retirement Account will return to the 2006 level. The rampant prosperity of the past is the punishment of the future, and recovery is years away. I don’t think the homebuilding industry is coming back this year or next.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service