BofA Upgrades Homebuilders Toll Bros, PulteGroup; Stocks Are Already Pricing In Mortgage Rate Spike

Home builders have underperformed, despite posting strong quarterly earnings and issuing robust guidance for 2022, according to BofA Securities.

The Home builders Analyst: Rafe Jadrosich upgraded the ratings for Toll Brothers Inc TOL and PulteGroup, Inc. PHM from Underperform to Buy. While raising the price target for Toll Brothers from $61 to $63, the analyst kept PulteGroup’s price target unchanged at $58.

The Home builders Thesis: Although home builders may face challenges due to rising interest rates, their stock valuations are near the lower end of the historical range and already pricing in the expected spike in mortgage rates, Jadrosich said in the upgrade note.

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“Affordability has worsened with rising mortgage rates and higher building costs,” but new home demand will remain strong, the analyst mentioned.

With “very tight” supply, “rents are skyrocketing and vacancy rates are historically low,” Jadrosich wrote. “Inflation is more painful to a renter than a homeowner,” he added.

The analyst further said that he expects demand to outpace supply through 2022. “Spring is off to another strong start based on builder commentary and positive web traffic data,” Jadrosich added.

TOL, PulteGroup Price Action: Shares of Toll Brothers had risen by 0.39% to $53.83, while PulteGroup’s shares had added 1.11% to reach $49.20 at the time of publication Monday.