Mortgage rates should keep falling, boosting home-builder stocks, analysts say
By Tomi Kilgore
Housing demand expected to remain weak in the first half of 2023, but valuations are already at recessionary levels, one analyst says
Shares of home builders enjoyed a broad rally Wednesday after BofA Securities said it sees a "favorable setup" for the sector, with lower mortgage rates on the horizon.
Analyst Rafe Jadrosich said that after the home-builder sector underperformed in 2022, with demand deteriorating in the second half of the year as mortgage rates more than doubled, he's still cautious on housing demand, especially in the first half of 2023, amid macroeconomic concerns.
However, Jadrosich has several reasons for believing home-builder stocks won't wait for demand to bottom out before they start rallying:
"Macro is a concern, but housing demand and builder valuations are already at recessionary levels, and we expect the inflation and rate backdrop to be more important for stock performance in 2023," Jadrosich wrote in a note to clients.
The iShares Home Construction exchange-traded fund (ITB) climbed 1.6% in midday trading, with 46 of 48 components trading higher. That outperformed the S&P 500's 0.5% gain.
Shares of Toll Brothers Inc. (TOL) went up 2.7% and shares of PulteGroup Inc. (PHM) jumped 1.8% after Jadrosich upgraded both builders to buy from neutral, and Lennar Corp.'s (LEN) stock tacked on 1.3% after he raised his rating to neutral from underperform.
Elsewhere, NVR Inc.'s (NVR) stock gained 1.3% after Jadrosich reiterated his buy rating but raised his price target to $5,500 from $4,900. Jadrosich said NVR was his top pick in the sector, as the stock has historically outperformed its rivals in a rising-rate environment and in periods of weak home sales.
BofA's Jadrosich wasn't alone Wednesday in being upbeat on home builders in the coming year.
The biggest gainers in the home-construction ETF were shares of TopBuild Corp. (BLD), which rose 5.2%, and Installed Building Products Inc. (IBP), which advanced 4.6%, after Deutsche Bank's Joe Ahlersmeyer upgraded both companies to buy from hold.
With interest-rate risk "now seeming to drift favorably," Ahlersmeyer said he is now "far more constructive" on stocks with new-residential-construction exposure.
"[W]e sense a growing optimism around the recovery path for housing, which could drive relative multiples back toward levels more consistent with a mid-cycle environment, even if demand for new homes were to simply demonstrate some stabilization," Ahlersmeyer wrote.
After plunging 26.9% in 2022, the home-construction ETF has gained 7.7% so far in 2023. In comparison, the S&P 500 is up 2.6% year to date after dropping 19.4% last year.
-Tomi Kilgore
(END) Dow Jones Newswires
January 14, 2023 09:58 ET (14:58 GMT)
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