Analyst Downgrades KB Home (KBH) Amid a 'Depressant' on Homebuilding Stocks

We recently published 10 Stock News You Should Not Miss as Tom Lee Reiterates Bullish Market Outlook Amid AI Catalysts. KB Home (NYSE:KBH) is one of the stock news you should not miss.

Stephen Kim, Evercore ISI head of housing research, recently downgraded several housing stocks, including KBH. During a program on CNBC, the analyst said that he believes the US government plans to find supply-side solutions to the housing problem, and that could negatively impact housing companies. Here is what the analyst said:

“They look at the builders and say these builders are deliberately building fewer homes than they could. They’re posting strong profitability and cash flow and buying shares back. They say, if the builders could produce more homes at lower prices, homebuyer affordability gets better, inflation improves, employment will improve, and new home prices can decline, even without dragging down existing home prices, which, by the way, has kind of been happening. There’s a lot of truth in what they say, but it misses something critically important, which I think the builders are really hoping they recognize: we have a demand problem right now. We don’t actually have a supply problem currently. If they had gotten builders to build a lot more three or four years ago, that would have been different, but today you’re slamming the gate shut when the horses already left the barn. We don’t have enough demand, so having the administration focus on supply-side solutions as opposed to mortgage spreads is a problem, and it’s unfortunate for the builders.”

However, the analyst believes housing stocks could trade at higher multiples in the long term.

“We believe the builders deserve and will get a revaluation to higher multiples than they have historically received. The basis for that is that if you look at how much the builders have improved their operations, how they have become more asset-light, and how they have more competitive advantages relative to their smaller peers. We look at all of what they’ve done and they’ve delivered significantly. These are companies that, if you compare them across almost any metric that matters relative to their S&P peers, they outperform them, but they trade at a fraction of what the other peers trade. We think that’s going to change. By the way, there’s a builder out there in the wild called NVR that’s already done this, and the other builders are following in its footsteps. We actually think that the builders are looking really good from a multi-year perspective, but unfortunately, you cannot disregard what the government and the administration are seeking to do here. In the near term, it’s going to be, we think, a depressant on the builder stocks.”

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Disclosure: None. This article is originally published at Insider Monkey.