In Los Angeles, California, financial firm Wedbush recently downgraded the shares of five leading homebuilder stocks. The firm’s decision was based on seasonal challenges faced during what they described as the most “normal” year for housing trends since 2019. Following the downgrade, Century Communities, LGI Homes, and Meritage Homes Corporation saw reductions in their price targets, while DR Horton and Lennar had their price targets maintained despite the overall downgrade to Underperform from Neutral.

According to Wedbush analyst Jay McCanless, the homebuilding industry in 2024 has experienced a level of normalcy in terms of seasonality not seen since 2019. The firm anticipates a normal seasonal decline in stock prices into the summer, especially after the seasonal trade window closes in April/May. While the earnings estimates for all five stocks remain unchanged, the firm’s bearish call comes as all five stocks, except for Lennar, have underperformed the iShares U.S. Home Construction ETF since the start of the year.

One factor contributing to the underperformance of these homebuilder stocks is the rising costs of land acquisition and development, as well as appreciating lumber prices. With higher interest rates and a lack of housing supply in the market, builders have shifted their focus to the entry-level buyer segment. To boost volume, builders have resorted to price cuts and incentives, albeit at the expense of squeezing gross margins.

McCanless predicts a similar scenario in the second quarter of this year due to mortgage rates remaining near highs of the cycle. While some housing economists expect a decline in mortgage rates towards the end of the year as the Federal Reserve cuts interest rates, McCanless holds a contrary view. He believes that mortgage originators are hesitant to bear prepayment risk without adequate compensation, leading to a wider spread between the 30-year mortgage and the 10-year Treasury to account for refinancing risk.

The outlook for the homebuilding industry remains uncertain as market conditions continue to evolve, impacting the performance of key players in the sector. As the industry navigates through challenges and opportunities, investors and stakeholders will be closely monitoring developments to gauge the future trajectory of homebuilder stocks.