Several US homebuilders are expected to experience pressure on their gross margins as they approach 2025, driven by increased incentives for entry-level specification homes and ongoing land inflation, as noted by BofA Securities in a recent analysis. During a webcast discussing the US housing market, Zonda Chief Economist Ali Wolf emphasized that the entry-level housing segment remains the weakest nationally, with high incentives continuing to be a trend.
Homebuilders are adopting a more cautious approach towards land acquisition in light of rising lot costs. Zonda provides vital data to homebuilders. Demand trends have yet to significantly improve after a slowdown in September and October. Analysts are optimistic, however, that latent demand could lead to improved traffic in the upcoming spring season.
Analyst Rafe Jadrosich mentioned in a client note that some builders reported a rebound in demand mid-November, following the US presidential election. The discussion with Wolf also highlighted that the inventory of resale homes is on the rise in certain markets, with builders sustaining their incentives and rate buy-downs largely due to an uptick in specification inventory, which is homes constructed without a specific buyer in mind.
In their sector analysis, the brokerage lowered price targets for stocks including D.R. Horton (DHI), PulteGroup (PHM), Dream Finders Homes (DFH), KB Home (KBH), Lennar (LEN), and Smith Douglas Homes (SDHC). BofA maintained buy ratings on D.R. Horton and PulteGroup, pointing to their potential for relative upside and more aggressive capital returns to shareholders compared to their peers.
They adopted a neutral stance on Dream Finders, KB Home, Lennar, and Smith Douglas Homes, highlighting a balanced risk-reward scenario at the current valuations. Notably, NVR (NVR) and Toll Brothers (TOL) are projected to perform well in the market. NVR's strong positioning stems from its focus on the US Mid-Atlantic, Midwest, and Northeast regions, where resale inventory remains low and home prices are increasing.
The company is regarded as one of the few builders that could see margin expansion in the early months of 2025. Toll Brothers is capitalizing on the robust performance of the luxury and move-up market segments, showcasing buyers who are less sensitive to interest rates, as revealed by BofA's analysis..