Analyst Upgrades PulteGroup And Lennar, Names Top Homebuilder Stock Pick For 2023

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Zinger Key Points
  • Bank of America Corp sees last years beat down in the housing market as the trough, and looks for a reversal in homebuilder stocks in 2023.
  • While BofA's top pick is not immune to the housing slowdown, it noted that the stock has outperformed others in a weak housing market.

Home may be where the heart is, but last year’s housing market conditions began to break them.

Home prices hit all-time highs in June, mortgage rates touched 21-year highs in October, home builder confidence and housing affordability dropped to their lowest level since 2012, and home sales fell 35.4% year over year in November.

Though, analysts at Bank of America Corp BAC see last years beat down as the trough. With median home prices now falling from all time highs, and mortgage rates beginning to take a downward swing, BofA research analyst Rafe Jadrosich upgraded a slew of homebuilders, and chose one of them to outperform others in 2023.

Check out more of Benzinga's analyst ratings, here.

The BofA Analyst: Jadrosich upgraded homebuilders’ PulteGroup, Inc. PHM from a Neutral to a Buy, Toll Brothers Inc TOL from a Neutral to a Buy, and Lennar Corp LEN from an Underperfrom to a Neutral.

Which homebuilder does BofA think will outperform in 2023?

The investment arm of the bank chose NVR, Inc. NVR as its top pick for homebuilders in 2023.

While NVR is not immune to the housing slowdown, Bank of America noted that the stock has historically outperformed others in a weak housing market due to its asset-light model. It raised the price target for NVR from $4,900 to $5,500.

Homebuilder stocks underperformed in 2022 as mortgages rates spiked to 21-year highs, and demand deteriorated in the second half of the year.

In 2023, Bank of America is cautious on housing demand especially in the first half of the year, but it sees a more favorable setup for homebuilder stock performance for the following reasons:

  • Homebuilder valuations are already pricing in weak demand and home price depreciation.
  • Mortgage rates have declined from peak levels and are poised to move lower in 2023.
  • The bank does not see material risk to book value as most of the land on balance sheets was purchased prior to 2021 and it expects a home price correction of 10% rather than a crash of 15%-20%.
  • Builder margins will benefit from lower input costs.
  • Read also: Zillow Gets A Buy Rating: Leading Bank Expects Housing Market To Trough In 2023

Bank of America renewed its price target on D R Horton Inc DHI from $84 to $10, and raised KB Home KBH from $34 to $38.

Image: Pixabay

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