Los Angeles, California – Wedbush recently downgraded shares of five major homebuilder stocks, citing seasonal headwinds during what they deem as the most “normal” year for housing trends since 2019. The firm’s downgrades affected Century Communities, LGI Homes, Meritage Homes Corporation, DR Horton, and Lennar.
According to Wedbush analyst Jay McCanless, 2024 has presented the most typical year for the home building industry in terms of seasonal patterns since 2019. The firm predicts a potential decline in stock prices for these companies into the summer, especially after the season’s trade window closes in April/May. Despite the downgrades, earnings estimates for all five stocks were left unchanged.
The downgrades come at a time when all five companies, except for Lennar, have underperformed the iShares U.S. Home Construction ETF since the beginning of the year. Rising land acquisition and development costs, coupled with increasing lumber prices, have contributed to this underperformance.
Builders have shifted their focus to catering to entry-level buyers, offering price cuts and incentives to boost sales volume. However, this strategy has led to a decline in gross margins. McCanless anticipates a similar trend in the second quarter as mortgage rates remain relatively high.
While many housing economists expect mortgage rates to decrease in the latter half of the year as the Federal Reserve cuts interest rates, McCanless holds a different view. He believes that mortgage originators are hesitant to bear prepayment risks without proper compensation. Additionally, McCanless points out that there is currently a significant spread between 30-year mortgages and the 10-year Treasury to accommodate refinancing risks.
Overall, the downgrades by Wedbush highlight the challenges faced by the homebuilding industry and the impact of various factors on stock performance. Investors will be closely monitoring how these companies navigate through the evolving landscape in the coming months.