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.
