UBS' John Lovallo: Housing market bottom in sight as builders stabilize

Core Viewpoint - The real estate sector is currently one of the worst-performing sectors, with homebuilders in correction territory, indicating a decline of 10% or more from their 52-week highs [1][2]. Company Performance - KB Home reported a strong quarter, beating all key performance indicators (KPIs) including deliveries, revenue, gross margin, operating margin, and earnings per share (EPS) [3]. - Despite a slight reduction in their sales forecast, KB Home noted stabilization in the housing market, particularly in key markets like Florida and Texas [4]. - The company is implementing significant incentives to stimulate demand, which has led to a decrease in average selling prices (ASPs) [6]. Market Outlook - There is a belief that the recent cuts in estimates by KB Home and Lenar may be the final adjustments, suggesting a potential bottoming out of the market [4]. - The outlook for 2026 is considered to be much better for housing compared to 2025, with increasing conviction in this perspective [5]. - If mortgage rates stabilize or decline, it could significantly enhance profitability for builders, with a projected 30% upside for KB Home under current rate conditions [7]. Industry Trends - Builders are currently facing pressure to lower prices to stimulate demand, with a noted year-on-year decline of 9% in ASPs for Lenar [5]. - The industry is optimistic about the potential for a strong off-season later in the year, with bullish sentiments across various builders [9].