- Raymond James Analyst Buck Horne downgraded the rating for the stock KB Home KBH, lennar corp LEN, MDC Holdings Inc MDC, Pulte Group Inc PHMand Toll Brothers Inc TOL to Market Perform.
- He downgraded the stock from DR Horton Inc DHI to beat Strong Buy’s rating.
- The move comes after a 200 basis point rise in 30-year mortgage rates over the past 2.5 months.
- With average effective mortgage rates now above 7%, virtually all of the housing affordability metrics tracked are in unprecedented territory, the analyst said.
- Horne calculated that monthly financing for an average existing home would be nearly 42% of the average family’s gross income at current prices, beating the previous 40% record that marked the 2006 peak in home construction.
- With the Federal Reserve poised to raise rates further, “we cannot predict when/if credit spreads will start to normalize,” he added.
- As such, he noted that the housing sector and homebuilders must now brace themselves for a Fed-guaranteed hard landing, with significantly lower absorption rates and downward pressure on new home prices.
- With assumptions now embedded in its new Street-Low EPS estimates, including absorption rates (orders per parish per month) dropping to 2011 levels, Average new home order prices fall 20-25% through FY23 and gross margins decline 650-1,000 basis points year-on-year in 4Q22-4Q23.
- Horne believes it would take a prolonged and severe economic recession over the next year to push projected estimates for 2024 into the red.
- He anticipates a further increase in elevated cancellation rates in upcoming homebuilders’ earnings, both due to skill issues and buyer remorse.
- He said one bright spot could be the turning point for some builders to build homes specifically for the single-family rental sector.
- Although the analyst expects unprecedented hikes in interest rates to dampen near-term housing demand, he continues to believe the US housing market is structurally…
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