Bank of America downgrades Lennar and Toll Brothers, warns home builders that they are facing a collapse in the rating.

After a boom in low interest rates and high demand, it may be time to take a more critical look at housing stocks, according to Bank of America.

Analyst Rafe Jadrosic downgraded Lennar and Toll Brothers to neutral and lower, respectively, after previously having ratings to buy them. Shares seem to be overvalued after a strong cycle for home builders.

“The profits of home builders have increased significantly over the last two years, supported by a strong price environment and extremely limited supply.” “In the long run, we believe that current margin (and profit) levels are unsustainable, as the industry will eventually return to an environment with greater supply and demand. We expect investors to increasingly rely on the cost of booking to appreciate home builders. ”

Toll Brothers received a double decline due to its exposure to higher-end housing, which could lead to weakened demand with higher interest rates, said Bank of America.

“We see Toll as more exposed to rising mortgage interest rates than other home builders, and homeowners who are locked into a favorable fixed-rate mortgage are less likely to trade in a new home if financing costs are higher. “

Bank of America lowered its target price for Toll to $ 58 per share from $ 61 and to Lennar to $ 113 per share from $ 125. The new targets are 3% and 21%, respectively, above Wednesday’s closing level.

Shares of Toll Brothers fell 2% in pre-market trading on Thursday, and Lennar fell 1.3%.

Of course, Bank of America is not bearish in all the shares of home builders. KB Homes’ rating changed to “buy” from “neutral”.
D. R. Horton with a purchase rating may perform better due to his focus on base-level housing.