Evercore ISI says Trump policies aren't helping the housing market. It just downgraded 6 homebuilders

Evercore ISI analyst Stephen Kim downgraded several major homebuilders, including D.R. Horton and KB Home, to 'in-line' from 'outperform' and cut price targets, advocating for the White House to prioritize lowering mortgage rates over increasing housing production. Kim noted that despite improved affordability, a meaningful demand response has not emerged due to depressed homebuying sentiment, leading him to anticipate a period of 'digestion' for these stocks. He expects margins must bottom before a rerating can occur, which is not foreseen in the immediate months, despite potential long-term rerating if companies focus on prudent capital allocation.

Analysis

The White House can aid homebuilders by shifting focus to lowering mortgage rates as opposed to lowering home prices, according to Evercore ISI. Analyst Stephen Kim said President Donald Trump's administration is looking mainly at increasingly housing production as a way to increase home affordability. But Kim said that stands in opposition to the firm's belief that "less is more" and could create unexpected consequences for the industry. "This summer, the homebuilder stocks rallied in anticipation that falling mortgage rates would stimulate a rebound in housing demand and a bottoming in fundamentals," Kim wrote in a Tuesday note to clients. "But so far, despite modestly improved affordability, a meaningful demand response has not yet emerged, as homebuying sentiment has remained depressed." Kim downgraded D.R. Horton , KB Home , Meritage Homes , Pultegroup , Toll Brothers and Tri Pointe Homes to in-line from outperform. He also cut price targets on many stocks in the sector. In the long term, Kim said these stocks could rerate to higher multiples as the companies prioritize prudent capital allocation and returns over growth. However, with the third-quarter earnings season unlikely to bring a short-term catalyst, he said to expect some digestion on the immediate horizon. "We believe margins must bottom before the stocks can rerate, and we do not believe that this will materialize in the next several months," Kim told clients. Evercore ISI analyst Stephen Kim has downgraded six major U.S. homebuilders, including DHI, KBH, and TOL, from 'outperform' to 'in-line,' concurrently reducing price targets across the sector. This action reflects a strongly negative sentiment (-0.65) and a bearish tone regarding the near-term prospects for the housing market. The downgrades are predicated on the observation that a meaningful rebound in housing demand has failed to materialize, despite recent improvements in affordability. Kim posits that depressed homebuying sentiment continues to weigh on the sector, overshadowing the impact of modestly improved affordability. He critiques the White House's focus on increasing housing production, advocating instead for policies aimed at lowering mortgage rates to stimulate demand effectively. The analyst suggests that current policy approaches could lead to unintended consequences for the industry. The immediate outlook for these homebuilders appears challenging, with Kim anticipating a period of "digestion" and no short-term catalysts from the upcoming third-quarter earnings season. A significant rerating of these stocks is unlikely until margins bottom out, a development not foreseen within the next several months. However, a long-term rerating remains possible if companies shift focus to prudent capital allocation and returns over pure growth.

Key Decisions for Investors

• Investors should exercise caution regarding U.S. homebuilder stocks (e.g., DHI, KBH, TOL) in the near term, given the bearish analyst outlook and an anticipated lack of immediate catalysts.
• Monitor mortgage rate trends and White House housing policy shifts, as these factors are identified as crucial drivers for potential demand recovery and sector performance.
• Consider long-term prospects for companies demonstrating strong capital allocation and a focus on returns, as these may be positioned for rerating once sector margins stabilize.