A long-awaited interest rate cut seems all but certain to happen this week, but homebuilder stocks have been climbing in anticipation of this moment since October 2023, when the Federal Reserve signaled the hikes had come to an end. That leaves the group with little room for error, according to RBC Capital Markets. Analyst Mike Dahl sees the stocks "priced for perfection" as industry fundamentals remain choppy underneath the surface.
"We believe caution is warranted tactically across our group, though most meaningfully for builders where valuations are more overextended, in our view," he said, citing Lennar and KB Home as two such examples where valuations may be pricey. Lennar shares have advanced more than 24% in 2024, and Dahl thinks it is price high relative to a return on tangible equity basis. KB Home shares are up 38% year to date, but most analysts rate the stock a hold or sell.
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