What to expect from homebuilder stocks in 2023?

“ITB” – the iShares U.S. Home Construction ETF has recovered about 20% since late October but the coming year is unlikely to be an exciting one for homebuilders, says Kenneth Leon of CFRA Research.

Here’s what Toll Brothers’ Q4 report tells us

Last night, Toll Brothers Inc (NYSE: TOL) reported its results for the recent quarter that topped Street estimates. Still, Leon said on CNBC’s “Worldwide Exchange”:

New orders were down 56% and their backlog was down 7.0%. That’s really the engine that drives construction and home deliveries. So, we’ll see a much slower year ahead for Toll Brothers and many of the homebuilders.

On the earnings call, CEO Douglas C. Yearly, Jr. also agreed that buyers were keeping on the side-lines amidst higher mortgage rates.

Consequently, Toll Brothers expects a year-over-year decline in deliveries and average price per home in fiscal 2023. For the year, shares of the Pennsylvania-based company are down nearly 30%.

Leon is neutral to negative on homebuilder stocks

According to Redfin, the aggressive rate hikes has sent the average monthly mortgage payment to a record high this year.

Leon is dovish also because he’s convinced that U.S. homebuilders will have to offer price incentives to attract buyers next year that will accordingly reflect on their financial performance.

Pace has slowed down significantly so they’ll have to create incentives on pricing. Will the second half of 2023 be crossing the valley to a more optimistic economy and Fed not raising rates, or cutting rates – that’s a leap of faith.

The CFRA analyst does not have a “buy” rating on any of the U.S. homebuilder stocks at present.