Homebuilders and building product stocks had a great run in 2021, but that growth could slow down in 2022 amid rising interest rates and a potential earnings peak, according to analysts at BofA Securities.
Although the homebuilder market will continue to be driven by demand for new homes and renovations from shifting demographics as more younger people look to become homeowners, analyst Rafe Jadrosich sees “a more challenging setup for stock performance.”
House affordability is worsening as prices appreciate and mortgage rates rise. In the past, homebuilder stocks have maintained an inverse relationship with mortgage rate movements, due to the real and perceived impact on affordability, Jadrosich said.
In response to the new macroeconomic conditions, Jadrosich downgraded
) to Underperform from Buy, and
) to Neutral from Buy.
The analyst believes Toll Brothers could underperform compared with its homebuilder peers. The company is more exposed to rising mortgage rates given that homeowners are less likely to trade-up to a new home if financing costs are higher, Jadrosich said. Toll Brothers also has long build cycles and is still challenged by supply-chain bottlenecks, he added. He lowered his price target on the stock to $61, down from $85.
Lennar shares also have historically underperformed the housing sector when mortgage rates are rising, but Jadrosich sees more upside to the stock. Lennar has a better market share position in the U.S., and its “everything included” building strategy could help the company navigate supply-chain bottlenecks better than its peers, he said.
Toll Brothers was dropping 2.6% to $54.71 on Thursday, and Lennar was down 1.5% to $91.77.
One of the best bets in the segment is
), the analyst said. He upgraded the stock to Buy from Neutral, saying that the stock trades at the cheapest price-to-book valuation, and could be a strategic purchase.
“KB Home shares have performed relatively well compared to homebuilders in prior rising mortgage rate environments,” Jadrosich wrote.
Jadrosich also believes
) could outperform the market. The stock is another one of his industry top picks, but he lowered his price target to $104 from $120 to reflect lower sector multiples.
KB Home was losing 0.7% to $39.94 on Thursday, while D.R. Horton was down 1.9% to $84.24.
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