Analysts at J.P. Morgan Adopt Cautious Stance on U.S. Homebuilders for 2025

Investing.com — Analysts at J.P. Morgan have indicated a more cautious approach towards U.S. homebuilders for 2025 due to a challenging demand and supply environment, margin pressures, and full valuations. As a result, the brokerage has downgraded key stocks within the sector, anticipating a slowdown in earnings growth.

Downgrades and Upgrades

• D.R. Horton Inc (BVMF:D1HI34) has been downgraded to "underweight" from "neutral," with expectations that the stock will underperform relative to its peers.
• Toll Brothers Inc (NYSE:TOL) and Meritage Homes (NYSE:MTH) have also been downgraded to "neutral" from "overweight."
• Conversely, Century Communities (NYSE:CCS) has been upgraded to "neutral" from "underweight," while PulteGroup Inc (NYSE:PHM) and Taylor Morrison (NYSE:TMHC) Home maintain their "overweight" ratings.

Outlook on Housing Demand and Supply

Analysts at J.P. Morgan foresee little improvement in major housing demand drivers, including interest rates, employment growth, and affordability. Supply conditions are expected to normalize, with existing homes returning to typical levels and new home availability increasing. This is anticipated to pressure home prices, which are projected to remain flat or only slightly increase next year.

Concerns Over Labor and Valuations

Furthermore, there is concern that policies from the Trump administration could disrupt the housing labor force, as immigrants have consistently made up the largest percentage of U.S. construction workers since 2004. Valuations in the sector are currently deemed stretched, with price-to-earnings and price-to-book ratios hovering near mid-cycle levels. The brokerage has lowered its price targets for homebuilder stocks by an average of 10%, reflecting diminished expectations for sector upside in the upcoming year.

Volatility in Homebuilder Stocks

Homebuilders experienced volatility in 2024, influenced by fluctuations in Treasury yields and mortgage rates. Following a strong finish in 2023, builder stocks softened in the first half of 2024 but rebounded sharply in the third quarter. However, the recent pullback has raised concerns as rates began to rise and fundamentals continue to stabilize.