The homebuilder sector continues to face pressure as 2025 gets underway. Despite a pro-growth and pro-business agenda of the Trump administration, there are issues like interest rates, building costs and availability that are all getting in the way of a US housing recovery.
BofA Securities has joined in with caution about U.S. homebuilder stocks. The worry is that the sector is facing a challenging setup into the spring selling season. The BofA report comes with analyst downgrades and lower price objectives.
Tactical Bulls always reminds investors and its readers that no single analyst report should ever be the sole basis to buy or sell any stock. That decision to buy or sell, or hold or short sell, is up to each investor and the decision should be made with a financial advisor.
All in all, BofA is expecting return on equity to decline in 2025 due to lot cost inflation and lower net prices after considering higher rates and more housing inventory. Analyst Rafe Jadrosich worries that U.S. builders will slow down the rate of housing starts if the spring selling season remains choppy and if persistently-high mortgage rates do not start to decline.
Photo by Jon Ogg of construction scene looking rather messy
What was hot may cool in 2025. The BofA report suggests that housing markets in the Northeast, Midwest and Mid-Atlantic regions may outperform housing markets in the Southeastern and Southwest markets and in Texas, Florida and Mountain states.
Several issues are seen as negative headwinds. Incentives are resulting in lower net price for builders. Land inflation is expected to remain particularly for builders that buy finished lots). New and used homes face elevated inventories in key markets like Texas and Florida. The public homebuilders are entering 2025 have lower backlogs than when entering 2024, and homebuilder valuations are slightly above the long-term average.
DR Horton (NYSE: DHI) was downgraded to Neutral from Buy and its price objective was cut to $150 from $160.
Smith Douglas Homes Corp. (NYSE: SDHC) was downgraded to Underperform from Neutral and its price objective was slashed down to $22 from $33.
KB Home (NYSE: KBH) was maintained as Neutral but its price objective was cut to $71 from $76.
Lennar Corporation (NYSE: LEN) was maintained as Neutral but the price objective was cut to $140 from $150.
Dream Finders Homes, Inc. (NYSE: DFH) was maintained as Neutral but its price objective was cut to $32 from $33.
BofA’s top picks in the builders sector are Toll Brothers Inc. (NYSE: TOL) and NVR Corporation (NYSE: NVR). BofA prefers NVR, Pulte and Toll over others because of upside to its price objectives and more aggressive capital returns to shareholders (share buybacks) compared to other builders. Notes and targets mentioned:
Toll’s price objective was cut to $156 from $165. Its valuation is considered to be attractive relative to other builders with similar or lower ROE.
NVR’s price objective was cut to $9,600 from $10,600 in the call. NVR is the only builder in our coverage universe that we forecast holding ROE flat in 2025 from 2024.
PulteGroup, Inc. (NYSE: PHM) was maintained as Buy and its price objective was trimmed to $134 from $135.
Please note that all price targets and ratings in this report are from BofA Securities. Tactical Bulls does not maintain any of its own formal ratings and/or price targets on the companies mentioned.