BofA Securities analyst Rafe Jadrosich downgraded homebuilders Lennar (NYSE:LEN), KB Home (NYSE:KBH) and Toll Brothers (NYSE:TOL) after new home demand has reset lower over the past three months after two years of unusually strong growth.
He upgraded Dream Finders (NASDAQ:DFH) to Neutral from Underperform as the company, which is concentrated in Florida, has high exposure to the build-to-rent segment, which BofA expects to outperform. DFH shares have jumped 7.5%.
"Homebuilder earnings and industry data indicate a sharp demand deceleration in June/July as a result of worsening affordability and lower consumer confidence," Jadrosich wrote in a note to clients.
Investors reacted positively to Toll Brothers (TOL) Q3 earnings despite a 60% Y/Y decline in net orders and its lowest quarterly absorption pace in more than 10 years, he added. the company's August-to-date deposit increase of 25% vs. July, though, was seen as a sign that the market has bottomed, the analyst said.
"We acknowledge July could be the trough, however we expect overall demand to remain weak" as many of the issues weighing on home demand, i.e., higher mortgage rates and elevated home prices, remain in place, Jadrosich said. "Favorable demographics and migration trends are tailwinds, but buyers no longer feel the same urgency as the prior two years and will be more patient."
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The Quant rating warns that Dream Finders Homes (DFH) is at high risk of performing poorly due to decelerating momentum and inferior profitability. It has a Buy rating on KB Home (KBH), with high marks for valuation and EPS revisions