Toll Brothers Inc., the largest American luxury homebuilder, said third-quarter profit fell 85% as the deepening housing slump cut sales, increased cancellations, and forced the company to write down property.

Net income in the three months ended July 31 declined to $26.5 million, or 16 cents a share, from $174.6 million, or $1.07, a year earlier, the Horsham, Pa.-based company said in a statement yesterday. Toll rose as much as 6.7% after the results exceeded analysts’s estimates.

The chief executive officer, Robert Toll, said the company had a higher rate of cancellations than at any time in its 21-year history as a public company. Five of the largest American homebuilders reported combined losses of $1.85 billion and took charges of $2.9 billion to write down land values and walk away from property options in their most recent quarters.

“It’s pretty ugly out there right now,” a senior research analyst at Kirr Marbach & Co. in Columbus, Ind., which manages about $571 million in assets and owned about 380,000 shares of Toll as of July 31, Dave Crossman, said. “They’re doing about as well as they can.” Toll gained $1.06, or 5%, to $22.15 in New York Stock Exchange composite trading. The average earnings estimate of analysts surveyed by Bloomberg was 2 cents a share.

Mr. Toll said visits to its developments have been “horrible.”

“Traffic is pretty stinky out there,” Mr. Toll said in a conference call with analysts.

Another homebuilder, WCI Communities Inc., reported a second- quarter loss after writing down $36 million in property and posting a decline in condominium sales. WCI rose as much as 10% after the company said it may sell up to $300 million worth of land. On August 20, WCI agreed to nominate its biggest investor, Carl Icahn, and his allies to the board. Toll said yesterday the housing market hasn’t stabilized.

“We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,” Mr. Toll said on the call.

Profit included a pretax writedown of $147.3 million for land, developments and options. Toll’s cancellation jumped to 24% from 18% a year earlier as customers canceled orders on 347 homes. Revenue dropped 21% to $1.21 billion.

The company refused to provide fourth-quarter earnings guidance citing uncertainties surrounding sales, mortgages, and possible future charges.

Toll’s backlog of houses under contract and not yet sold at the end of the quarter was $3.7 billion, down 34% from a year earlier. The backlog consisted of 4,997 homes, down 38% from a year earlier.

Toll said the company is concerned about the American credit crunch. The limited availability of “jumbo” mortgages of more than $417,000 and higher interest rates is cutting the pool of buyers for Toll homes, which sell for an average of more than $600,000.

“Our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles,” the CEO said in yesterday’s statement.

Banks and mortgage providers, including JPMorgan Chase & Co., Bank of America Corp., IndyMac Bancorp Inc., Countrywide Financial Corp., and Wells Fargo & Co. “continue to issue new commitments to our buyers,” the president of Toll Brothers’s mortgage company, Donald Salmon, said in the conference call.

Banc of America Securities analyst Daniel Oppenheim cut Toll’s shares to “sell” from “neutral” this week because of the credit crisis. The company may see cancellations increase and sales margins narrow as the tighter credit crunch restricts potential buyers’s access to mortgages, Mr. Oppenheim said. The analyst cut his price target on Toll shares to $19 from $29.