Investors should steer clear of homebuilding stocks as the housing market faces a significant slowdown, Bank of America said. Analyst Rafe Jadrosich downgraded shares of KB Home and Toll Brothers from buy to neutral and shares of Lennar to underperform from neutral, as the housing industry grapples with slowing demand and rising cancelation rates over 2020 and 2021 levels. “New home demand has reset lower over the last three months following two years of unprecedented growth,” Jadrosich wrote. “Homebuilder earnings and industry data indicate a sharp demand deceleration in June/July as a result of worsening affordability and lower consumer confidence.” Given these conditions, along with a slowdown in housing starts and land acquisitions, Bank of America anticipates downside to homebuilder estimates going forward. Across the U.S., Jadrosich suspects the biggest housing slowdown in the West and Mountain regions. He cited high exposure to these areas among his reasons for downgrading both Toll Brothers and KB Home. While Lennar has offset some exposure to difficult regions with its strong position in Florida, Jadrosich believes the stock trades at a higher price-to-book value relative to both Toll Brothers and KB Homes. Shares of all three stocks are down more than 27% this year and sit more than 28% off their 52-week highs. Bank of America also upgraded shares of Dream Finders Homes , given its exposure to Florida. “DFH is heavily concentrated in Florida and has relatively high exposure to the build-to-rent segment, which [we] anticipate will outperform the overall market,” Jadrosich wrote. — CNBC’s Michael Bloom contributed reporting
© heardonwallstreet.com