On a bright morning in late July, the corporate headquarters of Toll Brothers, the luxury homebuilder that profited mightily from the latest housing boom, are uncannily silent. Outside chief executive Bob Toll’s office, swaths of cubicles sit vacant and bare, depopulated by deep layoffs. Inside, a Bloomberg terminal scrolls dismal updates: A new report says home prices are plummeting by record margins; in markets like Las Vegas and Miami, they’re off almost 30 percent. Toll Brothers’ stock is trading at about $20, down two-thirds from its 2005 high.

Toll, compact and unassuming in a moss-colored suit, sits behind his desk in surroundings that seem incongruously modest for the man who stoked America’s demand for cathedral ceilings, Roman tubs, and four-car garages. We’re in a plain room overlooking a parking lot in an unremarkable suburban-Philadelphia office park. The only signs of excess are a helipad in the lot that the company laid down at the height of the boom to accommodate corporate choppers and the framed press clippings from those high-flying times that adorn the office’s walls. One headline reads BETTING AGAINST A HOUSING BUST. (View a pop-up graphic showing how Toll Brothers' models have grown more deluxe.)

Toll, never one to mince words, is merciless as he dissects how his wagers went wrong. “These are bad times if there ever were,” he tells me.

Perhaps no company better symbolizes the engorged consumption of the last real estate spree than Toll Brothers, which Bob founded with his brother, Bruce, in a one-room office four decades ago. During the height of the housing bubble, from 2004 to 2006, Toll Brothers reported nearly $16 billion in revenue, putting it in the top ranks of the industry. Its carefully cultivated brand—large, high-end suburban homes with all the latest must-have appliances—was among the most enviable in the business and catered to the yearning for bigger and better that the era’s easy credit allowed. Although Toll Brothers once had uncanny judgment, it has hit tough ground in the bust. Through the first nine months of 2008, Toll Brothers’ new sales contracts were down 49 percent from 2007, and 76 percent from 2005. The company reported a series of huge losses and has been forced to take massive write-downs—about $1.5 billion to date—on the value of its assets and landholdings. To mitigate the damage, Toll has laid off several thousand employees, nearly half his workforce, and walked away from numerous projects.

Toll offers me no excuses and freely concedes that he made some foolish deals. “We boatloaded a bunch of real estate in ’04 and ’05 that is underwater today,” he says ruefully. Though Toll once prided himself on his ability to see a downturn coming, he admits to having been blindsided by this one’s startling swiftness and severity. Some have wondered whether the instincts that served him so well in the past were dulled during a long period of plenty. “His timing before this was always impeccable,” says Jeffrey Orleans, a Philadelphia-area homebuilder who has known Toll since childhood and admires him. “This recession, he’s getting a bit beat up like the rest of us.”

Still, as many other real estate executives have headed for cover—or unemployment—Toll is reveling in the self-appointed role of cantankerous spokesman for his beleaguered industry. Earlier this summer he roiled financial markets when he told a conference of bankers that the housing market was in the throes of a “depression.” He lobbied Congress (unsuccessfully) for an emergency $15,000 tax break for home buyers. He’s been an outspoken supporter of Barack Obama’s presidential campaign. He’s turned his company’s regular conference calls into candid fireside chats in which he gives his unvarnished assessment of regional housing markets by issuing grades—an exercise so replete with failing scores that his chagrined junior executives have taken to calling it “the F report.” In our conversation, he spreads the blame liberally, even pointing to customers, saying it wasn’t the builders’ fault that banks made foolish loans and people took them, knowing full well what their incomes were:

“What cracked the market was not just our greed but the greed of our buyers.”

At 67, Toll is old enough to step aside and let others handle unpleasant times, but instead he approaches the wreckage with grim cheer. “It’s five times I’ve seen this movie,” he says. And the plot is always the same: Market drops, market recovers, home values rise again. Toll, having snapped up property at bargain-basement prices from wiped-out competitors, comes out stronger, richer, and better positioned. His plan is to do that again—and he thinks he has amassed the cash reserves to accomplish it. If all of Toll’s previous experience has offered a single lesson, it’s that the truly big money is made at the bottom, when other people are scared to buy. If he bets right again this time, he could lead his industry out of the doldrums. If he doesn’t, it augurs poorly for the entire sector—and perhaps indicates that the housing situation is even more dire than Toll imagined.

Homebuilding is an industry prone to spectacular cataclysms. Bob Toll became one of its patriarchs the same way Noah did—by staying afloat through the floods. “I think he loves being the grandfather of the business,” says Michael Greenberg, a former senior executive at Toll Brothers. In the early years, Bob was notoriously prickly and irascible—Bruce was the company diplomat—but age has smoothed his persona, turning sharp edges into charm and bluntness into wisdom. Toll’s conversational style resembles the layout of one of his developments, full of meandering byways and digressive culs-de-sac. He has a broad Philadelphia accent and cultivates an air of disarming schlumpiness. He’s been known to show up to industry conferences in sandals. Around the office, he wears a name tag, as do most Toll Brothers employees. Toll explained the policy to me by telling an intricate story, the gist of which was that he kept forgetting the secretaries’ names. Toll has been married for 33 years and has five children and trying to talk to him during the summer, when he vacations in Maine, is like conducting a conversation across a highway trafficked by grandkids and tennis partners.

The avuncular routine halts, however, at the first whiff of competition. When he was younger, Toll was an avid sailboat racer. Now he plays tennis with Stephen Solms, a retired Philadelphia developer whom he’s known since summer camp. “He doesn’t like to patshke the ball—he likes to really smash it,” says Solms.

Toll’s business demeanor isn’t that different. His father, also a real estate man, initially tried to prevent him from becoming a builder. Albert Toll had made a fortune as a young man and lost it during the Great Depression, and he never stopped regarding the business as perilous. In the mid-1960s, Albert happened upon a piece of ground in rural Chester County, Pennsylvania—its original owner had gone bust—and Bob, then just out of law school, begged his father to let him to develop the property. “You stick with the law,” Albert ordered, though he eventually gave in. Through all of  Toll Brothers’ success during the ensuing years, Albert, who died in 1995, never stopped warning his sons, “Don’t try to do too large of a deal, because it only takes one deal to bankrupt you.”

Bob continues to wrestle with the conflict between caution and daring, fighting the same battle he fought with his father on his very first project. He is attached to numbers and formulas, a latticework of rationality he’s erected around what is, at its foundation, a hunch-based business. Toll’s method for assessing risk is a complex equation he calls the model: in the old days, a formula crunched by calculators; these days, a sophisticated array of indicators parsed by computer software. Company executives speak of the model reverently, and Toll boasts that he devised it himself. “Speculating,” he told me, “is different than putting land in the model.” The model weighs the prices that homes on a prospective piece of land should fetch against projected costs, given certain assumptions about development expenses and interest rates. Toll builds a 10 percent cushion into all his estimated costs and presumes a conservative pace of sales. Unlike other builders, Toll says, he never forecasts that prices will increase during the interval it takes to get houses built.

The model protected Toll Brothers during previous downturns, telling it, for instance, to scale back at the end of the 1980s, ensuring the company’s survival during the savings-and-loan crisis. After that downturn, Toll went on a shopping spree, snapping up prime properties at cut rates. But this time, the model betrayed him. Toll says he now realizes it wasn’t designed to account for such a sustained frenzy and precipitous collapse. As the mortgage crunch set in and newspapers became filled with gloomy headlines, many buyers chose—irrationally, in Toll’s view—to walk away from substantial deposits. (Embarrassingly, one of them was Bruce Toll’s daughter.) Developments planned during the good times glutted the market just as demand evaporated. In 2004, Toll Brothers was selling units in about 220 developments; last year, the number was 315.

When I ask Toll if the worst is over for his company, he replies bluntly, “I don’t know.” Evaluating the true extent of Toll Brothers’ losses is difficult, because it all depends on the value of the land that the company acquired at the peak of the market. Homebuilding is a treacherous business because land, its essential raw material, can become a ruinous burden when the market takes a turn for the worse. Before selling a single house on their land, builders must secure zoning approvals, fight lawsuits, pave roads, and prepare for construction. Only at the end of that process, and at enormous expense, can their companies recoup a profit. The timetable places builders at the mercy of economic conditions five or 10 years in the future. Toll Brothers, like all of its competitors, tries to limit its risk by entering into option agreements when it acquires land, only closing the sale when the project is ready to go. In boom times, however, land prices rise and sellers have more power to demand an outright purchase. Builders then face a dilemma: They can keep buying land on unfavorable terms, or they can stop and amass cash, in which case they risk running out of ground to build on.

In 2006, when the market began to implode, Toll Brothers owned or had purchase options on more than 91,000 home lots—the most it had ever held and, by a low estimate, acreage equal to a city the size of Boston. The company has since tried to divest itself of as much of that land as possible, but it’s stuck with some of it. At the time of its last annual report, Toll Brothers stated that it controlled nearly 60,000 lots, including more than 31,000 that were not currently under development. Roughly half of the undeveloped parcels were concentrated in the hard-hit South and West, regions where Toll Brothers’ sales are off 29 and 66 percent this year, respectively. As of the quarter ended April 30, the company reported, the aggregate price of its outstanding land purchase agreements, some of which were only option deals, amounted to $1.8 billion. More than half of that figure was tied up in murky joint-venture agreements, about which Toll Brothers has issued vague warnings of potentially “significant” losses.

“Hi, I’m Bob Toll,” says the man on the 42-inch plasma-screen television. Inside a model home at Newtown Walk, a new Toll Brothers development in a Philadelphia suburb in Bucks County, a DVD presentation featuring the boss plays on a constant loop. The Tolls didn’t invent luxury housing, but they discovered how to mass-produce it. The basic approach was to take a few standard home styles—Georgian, Colonial, Tudor—and pump them up to steroidal proportions. Critics have labeled the products McMansions, a name that’s an insult to aesthetics and a compliment to marketing. “There’s a certain American spirit about bigger, better, more,” says Kira McCarron, Toll Brothers’ chief marketing officer, and the company came onto the scene at precisely the right historical moment to profit from that ethic.

Between 1980 and 2006, Toll Brothers executives point out, the number of U.S. households earning more than $100,000 grew at a rate five times faster than that of the general population. The newly prosperous demanded spiral staircases and basement barrooms. And they were willing to “drive till they qualified,” as the saying goes, accepting long commutes fueled by cheap gas in return for the grandest house the bank said they could afford.

Building an expensive house doesn’t cost that much more than building a cheap one. In terms of sales volume, Toll Brothers was the country’s 13th-largest homebuilder last year, with just one-sixth as many closings as the industry leader, D.R. Horton—a feat it was able to accomplish because its markups on houses were so high. Such margins propelled a national expansion. Concentrated in Pennsylvania and New Jersey at the time it went public in 1986, Toll Brothers quickly opened shop up and down the Eastern Seaboard, and then across the South, the Midwest, and the Pacific Coast, to 22 states in total.

In recent years, as its core clientele has aged, Toll Brothers has diversified, building “active-adult” communities. (Apparently, baby boomers don’t retire; they play.) The company’s also trying to appeal to a new affluent generation by building urban high-rises, including several in New York City. At One Northside Piers, a residential tower on the Brooklyn waterfront with 180 units, prices run from $450,000 to $2 million. A model unit offers stunning views of Manhattan, along with insight into the lifestyle that Toll Brothers thinks might characterize potential buyers. There are books everywhere, and a wall calendar is crammed with imaginary engagements: “MOMA opening,” “cocktail party,” “yoga class.”

A development I visit, just outside the quaint borough of Newtown, Pennsylvania, is a community of Federal-style townhouses (though in the world of Toll Brothers a townhouse comfortably fits a grand piano) that opened in April 2007. “We’ve seen a dip” in sales, admits Gregory LaGreca, the Toll Brothers vice president in charge of the project, “but not the major dip you’ve seen in other parts of the country.” In the development’s sales office, LaGreca stands in front of a glass-covered tabletop map that indicates 14 of 35 homes have closed sales—not bad. Then I notice another map illustrated with 102 home lots. LaGreca, momentarily embarrassed, tells me that was the original plan, which they intend to phase in.

“We don’t want to have too much for sale at one time,” he says. “It allows us to hang on to what we consider to be prime lots.”

Bob Toll’s personal beliefs have always been somewhat at odds with his brand identity. His primary residence is a 19th-century farmhouse in Bucks County. He’s owned the same apartment on Manhattan’s Upper East Side for 20 years. He is given to fulminating against the growing gap between most Americans and the vulgar rich—what he calls the “me-first aspect of society.” To many people who share Toll’s political views, “me first” might be perfectly symbolized by an enormous, energy-guzzling McMansion set far from a city. Toll recognizes the irony but doesn’t let it bother him.

“I don’t believe we’re building houses to make politics,” he says. “I believe in building houses to fulfill a market’s desires.”

In August, Toll attended the Democratic National Convention in Denver. One morning, he comes bounding out of an elevator at the Marriott where the Pennsylvania delegation is staying, wearing a dark-blue suit and a red tie with a nautical theme. Toll’s wife, Jane, is an Obama delegate; he’s just along for the ride with his “honey,” he tells me. Of course, as a big donor, Toll is no mere sidekick. The night before, he’d seen Howard Dean speak to a group of fundraisers. (“We’ve met several times,” Toll says.) As we have a cup of coffee, former Philadelphia mayor John Street ambles by. “How’s our project coming?” he asks Toll, referring to Naval Square, a historic hospital that Toll Brothers is converting into 636 townhouses and condominiums. Toll claps Street on the back and says, “Why don’t you stop in and buy something?”

“It’s never been politically comfortable to be in the homebuilding business,” Toll tells me when he sits back down. It’s particularly hard to be a Democrat—he gets a lot of flak from his fellow homebuilders, who are mostly Republicans. But Toll unabashedly dishes the liberal Democrat line when he says he doesn’t mind paying higher taxes. “When we all get better, we’ll all get better,” he says.

Toll speaks in aphorisms and parables, and when he finds one he likes, he repeats it again and again. He used to tell a tale about financial cycles—the story from Genesis about the Pharaoh and Joseph, who prophesied that seven fat years would be followed by famine. “I would go to meetings and I would say, ‘Guys, you’ve had seven good years. It can’t go on,’ ” he says. “Well it did, and it did, and it did.”

Between 2004 and 2006, the cost of land was skyrocketing, but so were home prices, so Toll’s model seemed to work. He gave interviews in which he predicted that an ever-constricting land supply would force future generations to live with their parents into middle age. His company purchased ground in unlikely places like West Virginia and the Poconos on similar assumptions, thinking buyers would endure hours-long commutes to Washington and New York. It entered into joint-venture agreements with other homebuilders to develop enormous projects in hyperventilating markets like Las Vegas, which has fallen harder than perhaps any other locale—69 percent of all homes sold there last quarter went for a loss.

Toll Brothers executives say they glimpsed the first signs of a downturn in mid-2005. Analysts started wondering about the company’s position months before that, however, when Toll Brothers insiders began selling off stock. Over a sustained period between December 2004 and September 2005, Bob Toll made $323 million from these transactions, Bruce Toll made $206 million, and other company executives took home smaller amounts. At the time, the sales were explained as diversification and estate-planning measures, and Bob Toll continued to call his company “a tremendous buy.” The sales are now the subject of a federal shareholder lawsuit, about which Toll would not comment.

“It’s easy to sit and judge with hindsight,” Toll says, referring to his company’s strategic missteps. “Look, if I had followed the biblical pattern and stopped expanding after seven good years—I had seven years of expansion from ’91 to ’98—I would have missed ’98 to ’05. So you just can’t say to yourself, ‘I’m going to knock it off now because this is good enough.’ ”

At what point, though, will Toll decide he’s had enough?

He admits that he gives frequent thought to retiring, a prospect that alarms his board members. “No one in this world is irreplaceable, but I think he’s as close as it gets,” says board member Robert Blank, also a longtime friend. Earlier this year, Toll’s board rejiggered his pay package to ensure that he would continue to receive bonuses during the downturn. But many shareholders balked, and the measure—and Toll’s renomination to the board—encountered significant opposition. “I think that’s a clear signal that shareholders of Toll Brothers are not happy with his leadership,” says Jennifer O’Dell, spokeswoman for the Laborers’ International Union of North America, which has pension money invested in Toll Brothers and has agitated against the bonus plan.

Bruce Toll scaled back his involvement in the company a decade ago and has since devoted himself to various other pursuits, such as financing movies and buying a stake in the Philadelphia Inquirer. But Bob Toll has never cared for any business except building, and he says he feels a responsibility to right his company. Friends say that this challenge has invigorated him.

“Bob would probably call it a well-disguised blessing,” says Richard Thaler, a retired investment banker who has known Toll for about 20 years. “He’s not happy where he is, but he’s in a good position relative to some of the other builders.”

In fact, stock analysts say that Toll Brothers could end up profiting over the long term from widespread misery. With a relatively low debt load and one of the largest cash reserves in the industry—roughly $1.5 billion, twice as much as its competitors’ on average—Toll Brothers seems to hold a decent position compared with others in its field. (In comparison, rival Hovnanian, ranked sixth in closings, has $119.9 million in cash, and Meritage, ranked 12th in closings, has $115 million.) While Toll has downsized some company divisions, he has kept his land-acquisition teams intact. “In the up markets, there are great opportunities to cash in your chips. In down markets, there’s great opportunity to build your chips,” he explains.

He’s waiting till the market hits bottom and then he’ll begin buying again. “We’re saving our powder for when blood runs in the streets,” Toll said in a conference call in December. “We hope it doesn’t happen, but if it does, we’ll put on the eye patch and get out the sword and run up the Jolly Roger and we’ll be out there.”

What remains to be seen, however, is what kind of company Toll Brothers will be when the crisis ends. Its luxury specialization, its great advantage during the long boom, may work against it during a recovery. The company refuses to lower its prices too much for fear of compromising its brand, which means it must accept the costs of carrying considerable inventory until demand returns. What happens, though, if the market for cheaper housing comes back before the luxury sector does? Or if buyers are more cautious about what they can afford next time? Then there’s a broader question: If the price of gas never returns to $2 a gallon, and people start considering the money—and carbon emissions—required to heat and air-condition a 16-room house, what becomes of the Toll Brothers ethic? The company’s executives say Toll Brothers is catering to universal appetites and has no plans to scale back its trademark homes.

Still, Bob Toll recognizes the dangers of stasis. “We’ve already started to change our patterns to some extent,” he tells me, pointing to his New York projects. He’s still not sure whether the high-rises are an experiment or a permanent departure. He’s wary of skyscrapers, because once you start building one, you can’t scale it back, and urban development is expensive. Still, he can read a price tag, and he can sense that times are changing.

On the other hand, daring got him into this mess, and daring will be what gets him out. Prices are down; interest rates are decent. All that’s required, he says, is for buyers to come back, to conquer their fears. “Nobody wants to be called a dope,” Toll tells me the morning I meet him at his office.


“The only thing we fear more than missing a good buy is being made to look like a fool.”

Toll’s telephone emits a loud beep, and his assistant’s voice pipes through a speaker.

“Joel,” she says, referring to Joel Rassman, the company’s chief financial officer, “wants to speak to you about WCI.”

Earlier in the morning, WCI Communities, another publicly traded luxury homebuilder, had issued a warning that it couldn’t cover its debts.

There is a pregnant pause: the prospect of a competitor going down; lots of potential ground. Toll’s eyes widen, as if glimpsing a wisp of future fortune.

“Okay,” he says to me, flashing a grin, “let’s wrap this up!”