Analysts from Bank of America cutting their rating on shares of three homebuilders in a note out Thursday as the housing market faces an economic slowdown.
Rafe Jadrosich at Bank of America Global Research downgraded shares of Lennar (LEN) to Underperform from Neutral, and shares of KB Home (KBH) and Toll Brothers (TOL) to Neutral from Buy, as rising interest rates challenge affordability for buyers.
"New home demand has reset lower over the last three months following two years of unprecedented growth," Jadrosich wrote. "Homebuilder earnings and industry data indicate a sharp demand deceleration in June/July as a result of worsening affordability and lower consumer confidence."
Earlier this week, Toll Brothers reported quarterly results that revealed lower delivery expectations and increased incentives amid what CEO Douglas Yearley called a "more of a buyer's market."
"Public builders have remained disciplined with incentives so far," Jadrosich added, "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."
In recent weeks there have been growing signs of a pullback in the broader U.S. housing market, in part because of rising mortgage rates and continued home-price appreciation locking out more buyers.
Last week, the National Association of Homebuilders (NAHB) said the U.S. is in the midst of a housing recession. These comments were followed by weak housing data this week showing a drop in contracts to buy both new and previously-owned homes.
On Thursday, data from Freddie Mac showed the average rate on a 30-year fixed mortgage rose again last week, to 5.55% from 5.13%, as investors continue to brace for further interest rate increases from the Federal Reserve.
Regionally, Jadrosich expects the West and Mountain regions will experience a more dramatic housing slowdown compared to other parts of the country. Exposure in these specific regions drove the firm's downgrade of Toll Brothers and KB Home.
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