Toll Brothers (TOL  ) was higher by 7% following its strong third-quarter earnings report which beat on the top and bottom line. Housing is one of the biggest parts of the economy and has secondary effects on consumer spending, consumer confidence, household balance sheets, etc.

Over the last decade, housing has been in a bull market which partially explains the economy's resilience over that time period. Of course, this bull market accelerated during the pandemic as inventories were low and demand shot up due to people eager to move away from urban areas to the suburbs and rural areas. Two contributing factors were historically low mortgage rates, which increased affordability, and the rise of remote work.

Inside the Numbers

Over the last few months, there has definitely been a softening in real estate. Some would say this is a healthy development as the market digests higher prices, while others view it as the end of the bull market. Therefore, earnings from homebuilders are eagerly awaited to provide more insight on this matter.

Toll Brothers reported earnings per share of $1.87, beating expectations of $1.52 per share and more than 100% better than last year's profit of $0.90 per share. This marks the fourth straight quarter that Toll Brothers beat on earnings. Revenue came in at $2.3 billion, slightly better than expectations of $2.2 billion but significantly better than last year's $1.7 billion.

One concern for investors in homebuilders has been the impact of the rising cost of materials and labor. At least, this quarter there was a minimal impact as the company's gross margins expanded to 22.7% versus 21% last year. This is due to some softening of material prices and the company being able to charge higher prices.

The company's backlog increased to 10,661, a 47% increase from last year. It also increased its outlook for the full year in terms of home deliveries to 10,100 units and increased its home sales gross margin to 25.6%.

Stock Price Outlook

From its May high to July low, Toll Brothers dropped by 25%. Since then, it's recovered the bulk of these losses and looks ready to challenge these highs.

While some softening in housing is to be expected given the unprecedented developments in 2020, the overall fundamentals remain solid as inventory remains low, demographics are favorable with Millennials entering their 30s and 40s, low rates prevailing, and household balance sheets in great shape. Until these fundamentals change, investors should look to accumulate shares on weakness.