Homebuilders Brace For Tough 2025, Analyst Downgrades D.R. Horton And Smith Douglas Amid Market Pressures

BofA Securities analyst Rafe Jadrosich downgraded D.R. Horton, Inc. (NYSE:DHI) and Smith Douglas Homes Corp. (NYSE:SDHC), citing a tough outlook for homebuilder stocks as the spring selling season approaches.

Notably, the analyst says that Homebuilder stocks lagged the market in 2024 due to declining demand in the second half of the year, driven by higher mortgage rates.

The analyst anticipates the tough environment for homebuilders will continue through the first half of 2025.

The analyst expects return-on-equity to decline in 2025 for seven out of eight homebuilders, with order growth impacting margins.

The analyst’s top picks in builders are Toll Brothers, Inc. (NYSE:TOL) and NVR, Inc. (NYSE:NVR). TOL’s valuation is attractive compared to other builders with similar or lower ROE. NVR is the only builder in the analyst’s coverage universe that can hold ROE flat in 2025 vs. 2024.

Housing markets in the Northeast, Midwest, and Mid-Atlantic should outperform the Southeast and other regions, while the move-up and luxury segments are set to outperform entry-level markets, adds the analyst.

DHI: The analyst downgraded D.R. Horton from Buy to Neutral and cut the price forecast from $160 to $150.

The analyst writes that lot costs, which make up 26%-27% of total costs, are rising (+3% QoQ, +10% YoY in first-quarter), and DHI expects similar inflation before moderating to mid-to-high single digits on year in the next couple of quarters.

Due to the tough housing macro (higher rates, more supply), DHI may struggle to raise prices to offset lot cost inflation, adds the analyst.

The analyst says that DHI is no longer investing in its rental segment, but rental inventory already accounts for 11% of book value.

Jadrosich expects a low single-digit ROE for rentals in 2025, which will drag overall ROE by >100bps.

Read: D.R. Horton Q1: Earnings Beat Despite Soft Housing Market, FY25 Outlook Reiterated

SDHC: The analyst downgraded the company from Neutral to Underperform and cut the price forecast from $33 to $22.

Jadrosich says that, like other builders, SDHC faces cost inflation headwinds while higher mortgage rates pressure net prices.

While ~15% community count growth and faster build cycles provide delivery tailwinds, the analyst notes absorptions will also need to improve to meet the guidance.

The valuation appears less compelling compared to peers, given the expectation that Smith Douglas’ delivery growth will moderate in 2025 and its ROE will normalize closer to the group average, adds the analyst.

The analyst expect delivery growth of around 4% in 2025 vs. preliminary guidance of roughly 11% at the mid-point.

Jadrosich expects Smith Douglas to enter 2025 with a backlog that is down roughly 13% YoY.

Price Action: DHI shares are up 2.64% at $146.69, while SDHC sharesa re down 0.37% at $24.22 at the last check Monday.

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