MW D.R. Horton, Pulte, Smith Douglas downgraded on chilly spring home-building outlook

By Steve Gelsi

BofA downgrades D.R. Horton and Smith Douglas, while Seaport cut views on Pulte and Taylor Morrison but upgrades Toll Brothers on its exposure to California rebuilding

A mostly challenging outlook for home builders caused analysts to reshuffle ratings on most of the big names in the sector on Monday.

"We expect the challenging environment for homebuilders to persist through [the first half of 2025]. Investors tend to focus on demand, but we are more concerned about higher cost inflation (rising land prices) and a more competitive selling environment (increasing inventory and higher mortgage rates)," said BofA analyst Rafe Jadrosich.

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The situation is not entirely bleak, however, and a couple of names drew upgrades as offering relative value compared with other stocks.

Also, the outlook for a home-building boom in fire-ravaged Southern California is helping the prospects for Toll Brothers Inc. $(TOL)$, which has a presence in the region.

BofA's Jadrosich said the sector is facing higher costs and inventory headwinds, with more ample supply in Texas and Florida, as home builders started the year with lower backlogs.

"Tariffs or changes to immigration policy could add additional cost inflation pressures," Jadrosich said.

Positives include demand for luxury homes, a healthier pace of new-home sales compared with historical levels and strong home-builder balance sheets, as well as a rise in home prices and shorter construction times.

"We think builders will slow the pace of starts if spring selling remains choppy and mortgage rates do not decline," Jadrosich said. "Housing markets in the Northeast, Midwest and Mid-Atlantic look poised to outperform markets in the Southeast, Texas, Florida, Mountain states and Southwest."

BofA downgraded D.R. Horton Inc. $(DHI)$ to neutral from buy. It also cut its rating on Smith Douglas Homes Corp. (SDHC) to underperform from neutral.

Toll Brothers and NVR Inc. (NVR) rank as BofA's top picks among home-builder stocks, Jadrosich said.

"[Toll Brothers'] valuation is attractive relative to other builders with similar or lower return on equity," he said. "NVR is the only builder in our coverage universe that we forecast holding return on equity flat in 2025 vs. 2024."

Meanwhile, Seaport analyst Kenneth Zener said he remains "negatively biased" toward home-building stocks due to rising new supply and stock valuations that remain 15% to 20% above trough levels.

He downgraded PulteGroup $(PHM)$ and Taylor Morrison Home Corp. $(TMHC)$ to sell from neutral and upgraded Toll Brothers to neutral from sell, due partly to its housing mix in California in the aftermath of wildfires in the Los Angeles area earlier this month. He also upgraded LGI Homes Inc. (LGIH) to neutral from sell on its attractive relative valuation.

-Steve Gelsi

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January 27, 2025 12:17 ET (17:17 GMT)

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