Bubble Busting

By Daniel Kadlec

Home prices have shown signs of sluggishness in Las Vegas and a handful of other markets, fueling the debate over whether we are in a dangerous housing bubble. TIME senior writer DANIEL KADLEC talked with Bob Toll, CEO of Toll Bros., one of the nation's largest luxury-home builders, who insists that any talk of a slowdown is premature.

TIME Let's start with the question you must be sick of: Is it a bubble?

BOB TOLL You're right. I am sick of it. No, we're not in a bubble. Prices have gone up because there has been tremendous constriction in supply along with tremendous immigration and increases in income for baby boomers. We're on track to see the cost of housing as a percentage of income come to the same place as it is in the U.K. and much of Europe, where they pay up to 45% of income for housing.

TIME Then how do you square soaring home prices with relatively stagnant personal income?

TOLL You can't square it. The polarization of wealth in the past 20 years has been extreme. The number of families making $100,000 a year has grown six times as fast as the population. The rich are getting richer and buying bigger houses. Meanwhile, as an industry, we're only building the same number of homes each year as 20 years ago, even as the population grows.

TIME But babies don't buy houses.

TOLL No, but immigrants do, especially the kind that Uncle Sam is letting into the country these days. They must have jobs and income. Immigrants are two-thirds of our population growth.

TIME There has been some evidence of a housing bust in Las Vegas. Will the trouble spread?

TOLL Las Vegas still has good margins for us. You're asking me if I've stopped beating my wife. Well, I never started.

TIME No slowdown at all?

TOLL There's been a leveling off. We can't raise prices as rapidly as we had been. But we can still raise them.

TIME Are any markets overbuilt?

TOLL Our cancellation rate is below 5%, where it almost always is. There are some softer markets, like Austin, Dallas, Raleigh, Hilton Head, Columbus. Charlotte was soft but is coming back. But New York, Chicago, Washington and almost every other market we're in are on fire.

TIME If mortgage rates increased 2% in a year, how would it affect the value of my home?

TOLL It depends on the neighborhood and price of the home. If it's in the $200,000 range and not in a particularly fresh neighborhood, you could see a drop of 7% to 10%. Buyers of these houses are on a budget, and higher rates eliminate a lot of buyers. But if you are in a $600,000 home, which is our range at Toll Bros., all you'll witness is cocktail talk.

TIME Homebuilder stocks have doubled in less than two years. But now short interest is on the rise [a bet by hedge funds that builder stocks will fall]. Is it really practical to buy these stocks today?

TOLL The shorts are going to get slaughtered. They are making a huge mistake.

TIME What's the next housing trend?

TOLL In the past couple of years we've begun dense suburban developments, and we're back in the cities with low-, mid- and high-rises. There just isn't enough ground left in the suburbs, and you have a whole new thrust from boomers and young hip-hoppers who want to be back in urban areas. Urban developments are less than 5% of our business, heading to 10%. It's definitely caught on. Look at New York. You could have bought the entire meat-packing district for $4. Now you can't get an apartment there for under $1 million.