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A BofA analyst downgraded shares of homebuilder stocks Lennar Corp. (NYSE:LEN), KB Home (NYSE:KBH), and Toll Brothers (NYSE:TOL) on Thursday, stating housing demand is reset for higher rates.
The analyst downgraded shares of Lennar to Underperform from Neutral, maintaining an $82 price target, while KB Home was downgraded to Neutral from Buy, with a $34 price target maintained, and Toll Brothers was downgraded to Neutral from Buy, with the firm’s $49 price target kept.
“New home demand has reset lower over the last three months following two years of unprecedented growth,” the analyst wrote in a note to clients. “Homebuilder earnings and industry data indicate a sharp demand deceleration in June/July as a result of worsening affordability and lower consumer confidence.”
He added that builders are currently adjusting to weaker demand by continuing to slow the pace of housing starts and land acquisitions.
“Public builders have remained disciplined with incentives so far, but we see risk that incentives (especially from private builders) will increase going forward given the weak absorption pace and a significant amount of new unsold inventory scheduled to be completed later this year. We see downside to homebuilder estimates and, on average, model EPS (14%) below consensus in 2023,” concluded the analyst.
