Homebuilders Cut on ‘Sluggish’ Housing Market, Florida Woes

(Bloomberg) -- Homebuilder-stock analysts are increasingly worried about signs of softening in key hot spots like Florida and Texas.

Lennar Corp. and D.R. Horton Inc. were downgraded by Citigroup Inc. analyst Anthony Pettinari on concerns the housing market could stay “sluggish” in the second half of the year. Raymond James Financial Inc.’s Buck Horne also cut his recommendation on Lennar to market perform from outperform, particularly pointing to the company’s “outsized exposure” to Florida.

“We see softness in data – permits, starts, sales and prices all recently below expectations – potentially continuing” in the second-half of the year, Pettinari wrote in a Tuesday note to clients. “New and existing home inventories are ticking up and the ‘twin engines’ of the hot US housing market – Texas and Florida – are seeing some areas of softening.”

Shares of Lennar and D.R. Horton each fell as much as 2.9% at the market open in New York.

Lennar, D.R. Horton Show Tepid Start to 2024 | After rallies last year, the homebuilders have been more muted

Homebuilder shares soared in 2023, but had a more measured start to 2024. The S&P Composite 1500 Homebuilding Index was nearly flat through the first six months of the year, while Lennar and D.R. Horton’s shares slipped after notching record highs.

Pettinari downgraded the pair of stocks because he sees long-term positives for both builders as being balanced by the signs of worsening housing fundamentals. The analyst says that single-family housing inventories have climbed quickly in the spring and are back around pre-Covid levels.

The pair of downgrades pushed consensus recommendations on Lennar shares to the lowest level since 2017, according to data compiled by Bloomberg.

Analysts Turn Least Bullish on Lennar Since 2017 | The recommendation consensus dropped after downgrades

Raymond James’ Horne is more specifically concerned about the outlook for the Sunshine State and its impact on Lennar. He said the “surging re-sale inventory, now warrants an added layer of near-term caution” particularly for the company, given its dominant share of the state’s market.

Last month, Lennar’s earnings included a third-quarter forecast for home orders that was below consensus expectations. On the company’s conference call, management said they saw “continued strength” in most Florida markets.

“We still remain constructive on our broader homebuilding coverage and steadfast in our conviction that the sector is long overdue for a material valuation re-rating,” Horne wrote in a note.

--With assistance from Subrat Patnaik and Norah Mulinda.

(Updates to add latest trading in fourth paragraph and first chart.)

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