No love for homebuilder stocks at the Bank of America

Homebuilder stocks are down about 25% for the year but a Bank of America analyst says the macro environment warrants not buying the dip.

BofA downgrades three homebuilder stocks

On Thursday, Rafe Jadrosich downgraded three stocks to “underperform” that speaks to his overall outlook on this space. The ones that made his list include KB Home, Lennar Corporation, and Toll Brothers that lowered its guidance for full-year deliveries a day earlier.

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His dovish stance is primarily related to higher rates and economic slowdown. In a note to clients, the analyst said:

New home demand has reset lower following two years of unprecedented growth. Homebuilder earnings and industry data indicate a sharp demand deceleration in June/July on worsening affordability and lower consumer confidence.

The average 30-year fixed mortgage rate currently stands at over 5.5% versus about 2.70% only in August of 2021.

New and pending home sales were down in July

So far, key rate has gone up 225 basis points in total this year. Consequently, new home sales were down 12.6% sequentially in July. Still, central bank says it won’t slam the breaks on lifting rates unless inflation shows signs of a meaningful and persistent decline.

Pending home sales were also down about 20% (year-over-year) last month. Jadrosich added:

We see risk that incentives (especially from private builders) will increase going forward given the weak absorption pace and a significant amount of new unsold inventory scheduled to be complete later this year.

The dovish call comes a week after the National Association of Homebuilders (NAHB) warned the United States was in a housing recession.