Analysts at Citi downgraded D. R. Horton (NYSE:DHI) and Lennar Corp. (NYSE:LEN) to Neutral in a note Tuesday, telling investors that the housing market may remain sluggish in the second half of the year.
"We're lowering estimates and target multiples for Homebuilders to reflect a slowing housing market, and downgrading DHI and LEN to Neutral," the Citi note states.
The bank said it sees softness in data, such as permits, starts, sales and prices. The data has all recently been below expectations, and Citi sees this potentially continuing in the second half of 2024.
"New and existing home inventories are ticking up (despite higher for longer rates) and the 'twin engines' of the hot US housing market – TX and FL – are seeing some areas of softening," adds the bank.
Analysts note that the beginning of Fed rate cuts is a potential second-half catalyst, but the historical record "suggests the stocks don't always rally into a cutting cycle."
"While in our view there is much to like about DHI and LEN (share gain, strong cash flows, resilient GM), we see risk and reward in 2H as roughly balanced, and move to the sidelines," concludes Citi.