Yahoo Finance BofA upgrades homebuilder stocks, sees 'home price correction rather than a crash'
Analysts at Bank of America raised their rating on shares of three homebuilder stocks in a note out on Wednesday amid expectations mortgage rates will drop, materials costs will fall, and home prices will avoid a crash in 2023.
In a new note to clients, Rafe Jadrosich at Bank of America Global Research upgraded shares of Lennar (LEN) to Neutral from Underperform with a price target of $102, up from $92, while raising shares of PulteGroup (PHM) to Buy from Neutral with a price target of $60, up from $46, and upgrading Toll Brothers (TOL) to Buy from Neutral with a $68 price target, up from $54.
Jadrosich also named NVR (NVR) the firm's top homebuilder pick for 2023 given shares have historically outperformed in weak housing markets. The firm raised its price target on NVR shares to $5,500 from $4,900.
“Homebuilder stocks underperformed in 2022 as mortgages rates spiked to 7% from 3% and demand deteriorated in the second half of the year,” Jadrosich wrote. “In 2023, we are cautious on housing demand especially in 1H [first half of the year], but we see a more favorable setup for homebuilder stock performance for a few reasons.”
Those reasons, Jadrosich explained to investors, are homebuilder valuations which have already priced in weak demand and home price depreciation, and mortgage rates that have waned from peak levels and are poised to move lower this year.
Additionally, Jadrosich sees no material risk to book value as most of the land on homebuilder balance sheets was purchased prior to 2021, adding: "We expect a home price correction (down 10%) rather than a crash (down 15-20%)."
Lastly, he explained that builder margins will benefit from lower input costs.
Still, Bank of America notes the outlook remains murky for the housing sector as demand and builder valuations have already hit recessionary levels.
The Federal Reserve’s aggressive tightening campaign to cool inflation has had an outsize impact on the housing market in 2022. With borrowing costs nearly doubling from the start of last year, similar themes will likely continue this year, Jadrosich warned.
Affordability also remains near record lows, existing homeowners will remain locked into their current homes at low rates, builders will have to increase incentives and cut prices to drive orders, and new home inventory will be elevated.
Moreover, tech-leveraged housing markets in areas like the West Coast, Mountain West, and Austin will likely underperform, in Jadrosich’s view.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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