According to Evercore ISI, the White House can help home builders by shifting its focus to lowering mortgage rates, as opposed to lowering home prices. Analyst Stephen Kim said President Donald Trump’s administration is seeing more and more housing production, primarily as a way to increase housing affordability. However, Kim said she opposed the company’s belief that it was “less” and could produce unexpected results for the industry. “This summer, housing builders stocks have come together in the hope that a decline in mortgage rates will stimulate the rebound and bottom of the foundation,” Kim wrote to his client in a memo on Tuesday. “However, so far, despite modest improvements in affordability, a meaningful response to demand has yet to be revealed as home-buying sentiment has dipped,” Kim has downgraded KB Homes, Meritage Homes, Pultegroup, Toll Brothers and Tri Pointe Homes inline from outperform. He also cut price targets for many stocks in the sector. In the long run, Kim said these stocks could rise to multiples as companies prioritize careful capital allocation and return more than growth. However, he said he would expect some digestion on the horizon soon, as the third quarter revenue season is unlikely to bring about a short-term catalyst. “We believe that margins must bottom before stocks become corrupted, and we don’t think this will happen in the coming months,” Kim told client.
