Ryland Grp.Assd (LSE:RYL)
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During the downturn, desperate home-building companies have cut prices dramatically and have thrown in everything from free vacations to below-market mortgage rates as enticements to get buyers to the closing table. Now, those days might be numbered.

As improving economic conditions soothe the nerves of jittery consumers, luxury home-building company Toll Brothers Inc. (TOL) is reducing incentives and raising prices "in selected communities." It isn't clear exactly where this is taking place, but any builder that is increasing prices, instead of shaving them, and cutting back on profit-eroding incentives signals a return to a more normal sales environment for a sector recovering from the worst downturn in decades.

"We believe that customers are recognizing that now is the time to get into the market to take advantage of near-record affordability and what is still, for now, a buyer's market," said Chairman and Chief Executive Robert I. Toll, as the company reported a widened fiscal third quarter loss Thursday.

Things appear to be looking up for housing. The U.S. Commerce Department said Wednesday that sales of single-family homes soared by 9.6% in July, the highest number since September 2008. While that information has a high margin of error, it comes as existing sales climb and builder confidence improves.

Toll isn't the only one adjusting its strategy. Eric Elder, a spokesman for Ryland Group Inc. (RYL), said "incentives are pulling back" and prices are stabilizing in most of its 28 markets nationwide. Meritage Homes Corp. (MTH) is building smaller and more-affordable homes with fewer upgrades, leaving less room for big-ticket specials.

"We can maybe deal a little bit from here, but we're not offering a $50,000 incentive package on a $200,000 home," said Brent Anderson, vice president of investor relations for Meritage, based in Scottsdale, Ariz. "It was easier to offer incentives when the market started to turn down because we had all this existing inventory that was built with lots of extras."

Of course, numerous headwinds remain, and there is the potential that Toll, which builds some of the sector's priciest units, could find itself again ponying up freebies and cutting prices should the market's decline return.

"This is good news for Toll, probably good news for the industry," said Joe Snider, vice president and senior credit officer with Moody's Investors Service. But "many companies in many industries try raising prices after coming out of a downturn, only to have to roll them back because the price increases don't stick."

Unemployment in the U.S. remains elevated, adding to the supply of foreclosed homes flooding the market. Home-building companies are having trouble competing with these bargain-priced foreclosures. And there is concern that the government's federal tax credit of up to $8,000 for first-time home buyers is pulling business forward, which could lead to a softened market after the credit's Dec. 1 expiration.

Horsham, Penn.-based Toll said that, while its third-quarter results reflect continuing challenging market conditions, there are "signs for optimism," including more solid demand and declining cancellations as fewer buyers abandon deals.

Toll reported that, four weeks into its fiscal fourth quarter, its non-binding contracts are running 26% ahead of the year-ago period. Credit Suisse expects a 25% increase in fourth-quarter orders. The home-building company previously said net orders, surprisingly, rose 3.1%, although they declined 4.7% in dollar terms. The cancellation rate fell to 8.5% from 19% a year earlier.

Toll, one of the industry's few known brands, now expects to deliver between 2,580 and 2,830 homes in its current fiscal year, up from its June view of 2,200 to 2,800. It could deliver between 475 and 725 homes in the fourth quarter at an average delivered price of $550,000 to $575,000 apiece.

Credit Suisse analyst Dan Oppenheim said he "would not be surprised to see Toll increase its community count in 2010 to take advantage of the improved demand."

Before the market opened Thursday, Toll said its fiscal third-quarter loss widened sharply on tax charges and write-downs. For the quarter ended July 31, it lost $472.3 million, or $2.93 a share, compared with a loss of $29.3 million, or 18 cents a share, a year earlier.

The latest results included federal and state deferred-tax asset valuation allowances of $439.4 million, and charges of $115 million. Excluding charges, Toll reported a pretax profit of $3.7 million for the quarter, compared with year-earlier pretax profit of $84.6 million.

Earlier this month, the company said revenue decreased 42% to $461.3 million.

"When it's all said and done, we view the quarter positively overall," noted Michael R. Widner, an analyst with Stifel Nicolaus Equity Research.

Shares of Toll Brothers, which have gained more than 25% in the last three months, recently traded down 12 cents at $23.02. The Dow Jones U.S. Home Construction Index recently was down 2% at 302 points.

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com

(Joan E. Solsman and Colin Kellaher contributed to this report.)