Homebuilder Confidence Continues To Fall, Analyst Expects Industry To 'Slow Further In 2023'

Zinger Key Points
  • Existing home sales dropped another 7.7% in November.
  • Bank of America says investors should expect homebuilding starts to continue to drop in 2023.

Existing home sales dropped another 7.7% in November to 4.09 million, missing consensus economist estimates of a 5.2% decline. Rising mortgage rates have tanked the U.S. housing market in 2022, but one analyst says that things could go from bad to worse in 2023 for homebuilder stocks such as D R Horton Inc DHI, Lennar Corp LEN and NVR, Inc. NVR.

The latest existing home sales data comes after November housing starts declined 0.5% month-over month and 16.4% year-over-year.

Related Link: What's Next For Stocks After Fed Issues 0.5% Rate Hike, Raises 2023 Inflation Outlook?

Analyst Take: On Wednesday, Bank of America analyst Rafe Jadrosich said investors should expect homebuilding starts to continue to drop as interest rates rise in 2023.

"We expect homebuilders to continue to moderate the pace of new construction and US single-family starts to fall to 750k range in 2023 due to weaker builder sentiment and builders’ response to higher inventory," Jadrosich said.

Related Link: Higher Inflation, Slower Jobs Market Ahead: Explaining The Federal Reserve's Latest Decision To Raise Rates 0.5%

November 2022 building permits dropped 11.2% on a monthly basis and 22.4% compared to a year ago. The Mortgage Bankers Association (MBA) purchase applications index is also down significantly from a year ago and tracking below 2015 levels.

Jadrosich said 74% of homebuilders are planning to reduce their number of starts in 2023 to match their current sales pace.

How To Play It: The weak housing market has weighed on homebuilder stocks in 2022, and stock selection may be critical for any investor looking to buy the dip. D.R. Horton shares are down 17.1% year-to-date, while NVR stock is down 20.4% and Lennar shares are down 21.8%.

Bank of America has the following ratings and price targets for the stocks mentioned:

  • NVR: Buy rating, $4,900 price target.
  • D.R. Horton: Buy rating, $84 price target.
  • Lennar: Underperform rating, $92 price target.

Benzinga's Take: The Federal Reserve triggered a boom in the housing market when it cut interest rates to roughly zero during the COVID-19 pandemic. The flood of home sales likely pulled housing demand forward, leaving little remaining demand now that mortgage rates have risen significantly in 2022.

Photo: Courtesy of Shutterstock.

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