By many measures, the housing slowdown only intensified into 2023, though, Bank of America analyst Rafe Jadrosich now sees a more favorable setup for homebuilding stocks this year and called NVR (NYSE:NVR) his top industry pick for the year.
And while NVR (NVR) is not immune to the housing cooldown, "shares have historically outperformed in weak housing markets due to its asset-light model," Jadrosich explained in a note, adding that the company has favorable regional exposure.
He also upgraded shares of Toll Brothers (NYSE:TOL), +1.9%, and PulteGroup (NYSE:PHM), +2%, to Buy from Neutral, as well as Lennar (NYSE:LEN), +1.5%, to Neutral from Underperform. TOL, PHM and LEN all ascended in premarket trading.
There are several reasons why homebuilder stocks are set to outperform relative to last year's sluggish returns, one being homebuilder valuations are already pricing in weak demand and deterioration in home prices, Jadrosich noted.
Secondly, mortgage rates, albeit elevated, have come off their 2022 peak "and are poised to move lower" this year, he added. And "builder margins will benefit from lower input costs" such as lumber.
That said, homebuilder margins are set to bottom out in the first half of 2023, the note said.