In a recently published analysis, it has been noted that declining mortgage rates herald a positive outlook for homebuilders, with the potential for both sales and margins to improve significantly. This perspective was articulated by BofA Securities in a note directed to clients on Thursday. Over the course of the last two months, we have witnessed a sharp decline in mortgage rates, which is expected to positively influence sales figures and margins for homebuilders, according to the brokerage’s findings.
The comprehensive insights from the firm's mortgage-backed securities team suggest that by the end of the year, mortgage rates may be in the range of 5.75% to 6.0%, a notable reduction from the current rate of 6.20%. On Wednesday, it was reported that homebuilder stocks ended the trading session in a 'flattish' state, as mortgage rates remained relatively stable following a 50 basis point reduction in the Federal Reserve's benchmark lending rate.
Analyst Rafe Jadrosich from BofA pointed out that the behavior of homebuilder stocks and the prevailing mortgage rates had already taken into account the anticipated rate cuts, especially after the recent market rally over preceding months. The ongoing decrease in mortgage rates is expected to catalyze housing demand; however, the degree of this impact will be crucial.
Despite homebuilders having considerably increased shareholder capital returns, there remains 'significant capacity' for further share repurchases, enabled by their robust balance sheets and enhanced free cash flow, as stated in the analysis. In a further elaboration, Jadrosich mentioned that public homebuilders are strategically positioned to capture market share from private builders, who are grappling with notable soft cost challenges arising from a surge in the financing costs related to construction and land development loans.
However, it's worth noting that a further weakening of the job market could impose additional pressure on housing demand, which will need to show improvement to rationalize the current elevated valuations of homebuilders. Looking ahead, Lennar Corporation, denoted as ($LEN), is set to unveil its fiscal third-quarter financial results following Thursday's closing bell.
BofA has estimated Lennar’s earnings at $3.62 per share, slightly lower than Wall Street's consensus estimate of $3.65. The note indicated that the company’s order metrics might be adversely affected due to a weakened demand backdrop observed during June and July. Additionally, KB Home, abbreviated as ($KBH), is anticipated to deliver its fiscal third-quarter earnings per share on September 24, with projections suggesting a figure of $2.03, in comparison to the Street's estimate of $2.06.
BofA sees potential for an upside in KB Home's gross margin guidance for this quarter, indicating that the full-year gross margin outlook might also be conservative, as margins in the third and fourth quarters historically tend to be stronger than those in the first half due to fixed cost leverage. In conclusion, while the decline in mortgage rates potentially enhances the attractiveness of homebuilders in the market, continuous monitoring of economic indicators, especially those relating to consumer demand and employment, will be essential for stakeholders in this sector.
Price: 191.30, Change: +2.87, Percent Change: +1.52.