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Beleaguered Homebuilder Stocks Hit by Wave of Analyst Downgrades

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(Bloomberg) -- Analysts from Wells Fargo & Co. to Bank of America Corp. are cutting their ratings and share-price targets on homebuilders as surging mortgage rates and accelerating inflation erode the pandemic-era demand.

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The S&P Supercomposite Homebuilders Index slumped 14% this week, notching its worst drop since April 2020, as investor concerns deepened on the potential for a US recession amid surging mortgage rates and slumping housing starts.

At least three analysts have reduced their ratings on stocks within the group over the past two days, signaling there could be more pain for this hard-hit sector.

“Housing market softness is hitting faster than many anticipated,” Wells Fargo analyst Deepa Raghavan wrote in a note Friday, as she downgraded a trio of builders. Toll Brothers Inc. was cut to equal weight from overweight, while M.D.C. Holdings Inc. and Meritage Homes Corp. were reduced to underweight from equal.

Surging borrowing costs and accelerating inflation shaken investor confidence in the resiliency of the demand for homes that was spurred by the pandemic. On Wednesday, the Federal Reserve announced a three-quarter point rate hike, the biggest since 1994. Fed Chair Jerome Powell said the housing sector appeared to be softening, in part reflecting higher mortgage rates.

The homebuilders benchmark, which includes companies such as KB Home and D.R. Horton Inc., has slumped about 43% this year -- poised for its biggest annual decline since 2007 -- outpacing losses on the S&P 500 Index.

Read more: Builders Slash Prices to Unload Homes in Fast-Cooling US Markets

For Bank of America analyst Rafe Jadrosich, the urgency to buy homes has dissipated and he expects a pause in demand that could stretch into 2023. He downgraded homebuilder Dream Finders Homes Inc. and products maker Owens Corning to underperform in a report Friday and raised AZEK Co. to a buy recommendation, citing its lower valuation.

“We still see positive long-term drivers to new home demand including a demographic tailwind and a shortage of homes following a decade of underbuilding, but the urgency to buy has evaporated and we expect a pause in the housing market that could stretch into 2023,” Jadrosich writes, while he sees homebuilders’ valuations as attractive at current levels.

Earlier this week, B. Riley analyst Alex Rygiel reduced his ratings on a trio of homebuilders to neutral from buy and cut his share price targets on Tri Pointe Homes Inc., Taylor Morrison Home Corp. and Green Brick Partners Inc.

“We cannot ignore investors’ expectations for higher interest rates and the impact it has had, and could continue to have, on the broader markets and the homebuilding sector,” he said in his report.

Taylor Morrison, Tri Pointe, Century Communities Inc., M.D.C. Holdings Inc. and LGI Homes Inc. are the worst-performing stocks within the sector this week, falling more than 19% each.

(Updates to market close)

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