Core Viewpoint - The outlook for homebuilder stocks is challenging as the spring selling season approaches, with declining demand and higher mortgage rates impacting performance [1][2]. Group 1: Company Downgrades - D.R. Horton, Inc. (DHI) has been downgraded from Buy to Neutral, with the price forecast reduced from 150 [3]. - Smith Douglas Homes Corp. (SDHC) has been downgraded from Neutral to Underperform, with the price forecast cut from 22 [6]. Group 2: Market Conditions - Homebuilder stocks lagged the market in 2024 due to a decline in demand in the second half of the year, primarily driven by higher mortgage rates [1]. - The tough environment for homebuilders is expected to persist through the first half of 2025 [1]. Group 3: Financial Projections - The analyst anticipates a decline in return-on-equity (ROE) for seven out of eight homebuilders in 2025, with order growth negatively impacting margins [2]. - DHI's lot costs, which constitute 26%-27% of total costs, are rising, with a 3% quarter-over-quarter and 10% year-over-year increase in the first quarter [4]. Group 4: Company-Specific Insights - DHI is no longer investing in its rental segment, which already accounts for 11% of book value, and is expected to have a low single-digit ROE for rentals in 2025 [5]. - SDHC is facing cost inflation headwinds and higher mortgage rates, which pressure net prices, despite a 15% community count growth and faster build cycles [6][7]. Group 5: Regional Performance - Housing markets in the Northeast, Midwest, and Mid-Atlantic are expected to outperform the Southeast and other regions, with the move-up and luxury segments set to outperform entry-level markets [3].
Homebuilders Brace For Tough 2025, Analyst Downgrades D.R. Horton And Smith Douglas Amid Market Pressures