Wedbush downgraded shares of five homebuilder stocks on Tuesday, citing seasonal headwinds in what he said was the “most normal” year for real estate trends since 2019.
The company downgraded all five stocks from Neutral to Underperform and lowered its price target on Century Communities (CCS) to $82 from $92, LGI Homes (LGIH) to $74 from $88- Dollar and Meritage Homes Corporation (MTH) from $155 to $148, while keeping its price target unchanged for shares of DR Horton (DHI) and Lennar (LEN).
“No year in homebuilding ever follows a precise schedule with a perfect increase in demand in the spring followed by a seasonally normal decline in demand into the summer,” Wedbush analyst Jay McCanless wrote.
“However, 2024 was the most ‘normal’ year we have seen for the homebuilding industry since 2019 in terms of normal seasonality. Therefore, we believe these names could see a normal seasonal share price decline into the summer, particularly after seasonal trading.” The window closes in April/May.
Notably, the company left earnings estimates unchanged for all five stocks.
The pessimistic forecast comes as shares, with the exception of Lennar, have underperformed the iShares US Home Construction ETF (ITB) year-to-date.
“We expect this underperformance could worsen if land acquisition and development costs continue to rise and lumber prices continue to rise,” McCanless wrote.
Longer-term higher interest rates and a lack of housing supply have allowed builders to focus their attention on an underserved segment – the entry-level buyer. Builders have offered price cuts and incentives to increase volume. But this strategy has negatively impacted gross margins.
McCanless expects the same story to happen in the second quarter of this year as mortgage rates continue to remain near cycle highs. According to Freddie Mac, the 30-year fixed-rate loan fell to 6.79% from 6.87% the week before.
Many real estate economists expect mortgage rates to fall in the second half of the year as the Federal Reserve cuts rates. But McCanless doesn't think the move will be so mechanical.
“We believe that this is still the consensus view in the market, but we take the opposite view in this regard because we believe that mortgage lenders (banks and non-banks) are not willing to bear the risk of early repayment without for this risk of being compensated,” he noted.
McCanless also points out that the spread between the 30-year mortgage and the 10-year Treasury note is now “artificially wide” to account for refinancing risk.
Comments are closed.