- Raymond James analyst Buck Horne lowered the rating on the shares of KB Home KBH, Lennar Corp LEN, M.D.C. Holdings Inc MDC, PulteGroup Inc PHM, and Toll Brothers Inc TOL to Market Perform.
- He downgraded the shares of D R Horton Inc DHI to Outperform rating from Strong Buy.
- The move comes after a 200 basis point increase in thirty-year mortgage rates over the past 2.5 months.
- With average effective mortgage rates now north of 7%, virtually all housing affordability metrics tracked are now in unprecedented territory, said the analyst.
- Horne calculated the monthly finance for a median existing home would be almost 42% of a median family's gross income at current prices, topping the prior 40% record that marked the 2006 housing peak.
- With the Federal Reserve ready to raise rates further, "we cannot predict when/if credit spreads will begin to normalize," he added.
- As such, he noted the housing sector and homebuilders must now brace for a Fed-assured hard landing, with significantly lower absorption rates and downward pressure on new home prices.
- With assumptions now embedded in his new Street-low EPS estimates, including, Absorption rates (orders per community per month) dropping to 2011 levels, New home average order prices dropping 20-25% by FY23, and gross margins declining y/y between 650-1,000 basis points from 4Q22 to 4Q23.
- Horne thinks it would take a sustained and severe economic recession throughout next year to put any prospective 2024 estimates in the red.
- He anticipates another surge of elevated cancellation rates in the upcoming homebuilders' earnings, both due to qualification issues and buyers' remorse.
- He said that one bright spot could be some homebuilders' pivot to building homes specifically for the single-family rental sector.
- Though the analyst expects the unprecedented interest rate surges to stall out near-term housing demand, he continues to believe the U.S. housing market remains structurally undersupplied.
- Price Action: PHM shares are trading higher by 1.65% at $37.19 on the last check Friday.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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