Dec. 5 (Bloomberg) -- Toll Brothers Inc., the largest U.S. builder of luxury homes, said the U.S. housing market may have reached bottom.

``We may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above,'' Chief Executive Officer Robert Toll said today. Toll's shares rose as much as 4.8 percent and every company in an index of homebuilders gained.

Home sales and ancillary purchases such as furniture account for about 23 percent of U.S. GDP, according to the Joint Center for Housing Studies at Harvard University in Cambridge. The ``cooling'' of the housing market has slowed U.S. economic growth this year, the Federal Reserve said in an Oct. 25 statement that held its benchmark rate at 5.25 percent.

The Standard and Poor's Supercomposite Homebuilding Index of 16 companies climbed 2.8 percent to 713.87 at 11:45 a.m. as Toll's statement and a 10-month low in U.S. mortgage rates fueled hopes that housing demand would grow.

Toll's net income in the three months ended Oct. 31 fell 44 percent to $173.8 million, or $1.07 a share, from $310.3 million, or $1.84 a year earlier, the Horsham, Pennsylvania-based builder said today in a statement. The average home price was $710,000 in the quarter, up from $679,000 a year ago.

Fiscal 2007 earnings may drop as much as 62 percent, Toll said in the statement. It takes up to a year to build and sell a Toll house, double the industry average. An improvement in demand now wouldn't be reflected in its profit until the properties are sold.

Spring Market

Homebuilders such as Toll and industry leader Pulte Homes Inc. are hoping the so-called ``spring market'' will see an improvement in demand after a year of slumping sales. February and March are traditionally the busiest months for homebuilders because buyers want the homes to be completed by the start of the U.S. school year in September.

``This spring is going to be very important,'' said Todd Vencil, an analyst at BB&T Capital Markets in Richmond, Virginia, who rates Toll shares as ``buy.'' ``Last year it was bad. It was not a good selling season. People just never showed up.''

Toll was expected to earn $1.08 a share in the fourth quarter, according to the average estimate compiled by Bloomberg. The average estimate of 17 analysts surveyed by Thomson Financial was $1.06. Thomson doesn't disclose the parameters of the estimates to Bloomberg News.

Fiscal Year Forecast

Shares of Toll rose $1.12, or 3.5 percent, to $33l.03 at 11:45 a.m. in New York Stock Exchange composite trading. The stock had declined 7.9 percent this year through yesterday, compared with a 21 percent drop in the Standard & Poor's Supercomposite Homebuilding Index.

The company forecast profit for the current fiscal year of $260 million, or $1.58 a share, to $340 million, or $2.08. Toll earned $4.17 a share in the fiscal year ended Oct. 31.

Toll took a pretax charge of $115 million on optioned and owned land in the fourth quarter, equivalent to 42 cents after tax. On Nov. 7, it forecast a charge in the quarter of as much as $100 million, or 36 cents.

Toll said it may complete 7,300 homes this fiscal year, 1,300 less than the number of closings last year. The company cut the number of lots it controls to 74,000 at the end of the fourth quarter from 91,200 six months earlier.

Toll included a pretax charge of $60 million for land-related writedowns in fiscal 2007 in its earnings forecast. That was almost four times the $16 million it had budgeted annually in recent years.

Stabilizing Markets

The suburbs of Virginia and Maryland around Washington D.C. may be stabilizing ``although at levels much lower than those we have enjoyed in the past few years,'' Robert Toll said in the statement. The northern Virginia market near Washington was the first to experience a slowdown, he said.

``I think they called that one out because they have a lot of exposure to that market,'' said Jack Lake, a research analyst at Victory Capital Management Inc. in Cleveland, whose Victory Value Fund owned 85,000 Toll Brothers shares at the end of September.

The average rate for a 30-year fixed mortgage reached a 10- month low last week, according to Freddie Mac, the second-largest mortgage buyer. The rate was 6.14 percent, the lowest since January. A year ago, it was 6.26 percent.

The Commerce Department said last week the inventory of unsold houses on the market fell for the third straight month to 558,000, down from a record 573,000 in July.

New home sales declined 3.2 percent in October to an annual rate of 1.004 million. The median price for a new house was $248,500 in October.

Orders Sink

Toll said on Nov. 7 that orders slid 58 percent in the fiscal fourth quarter as more than one-third of customer contracts were canceled. Revenue declined 10 percent to $1.81 billion, giving a full-year sales figure of $6.1 billion.

Accounting changes will shift as much as $350 million in revenue and up to 29 cents a share in profit from fiscal 2007 to subsequent years, Toll said.

A total of 585 contracts were canceled in the fourth quarter.

``With these cancellations creating unintended specs, we could face increasing margin pressure as we seek to move these homes,'' Robert Toll said in the statement.

Toll's backlog, the number of units ordered that have not yet been sold, totaled $4.49 billion at the end of October, down 25 percent from the end of October 2005.

Toll said it would complete 6,300 to 7,300 homes this fiscal year, which is what it predicted on Nov. 7. That is less than its August forecast of 7,000 to 8,000. The decline is due to cancellations and fewer contracts, the company said.

Signed Contracts

The value of contracts signed fell 56 percent to $706.3 million in the quarter, down from a $1.59 billion record in the same period a year ago. The company said on Nov. 7 the contract signings were hurt by a ``higher than normal 585 cancellations.'' Nearly 25 percent of the cancellations came in the Orlando, Florida and Northern California markets, Toll said.

During the quarter, Toll Brothers sold 2,502 homes, compared with 2,957 houses during the same period last year.

Homebuilders are using sales incentives such as free televisions to lure buyers. Toll advertised no payments for up to six months on some houses in a community outside of Chicago in the Nov. 4 Chicago Tribune.

At a Toll development in South Barrington, Illinois, a suburb northwest of Chicago, the company lists on its Web site a 5,565 square-foot, five bedroom, four bathroom house for $1.6 million.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: December 5, 2006 11:55 EST