By Shaina Mishkin

While there still aren't enough homes in the U.S. for everyone who would want to own one, that isn't going to help builders, says Evercore analyst Stephen Kim.

He was confident that a shortage of homes would support prices during Covid-19 in 2020 and as mortgage rates rose in the years that followed. "On the Street, I was the most vocal about the fact that we have housing deficit as my reason for why home prices would not go down," he tells Barron's.

But now, his view has changed with the circumstances. "I'm here to tell you now that we have a housing deficit -- but the deficit does not allow the builders to build a lot more houses unless you want home prices to fall."

Mortgage rates have come down from their 2025 highs of around 7%, yet buyers have remained few and far between. "The softer-than-expected response to the recent drop in mortgage rates reflects the fact that affordability wasn't really the main culprit behind this year's sluggish demand in the first place," Kim wrote in a Tuesday report. "We believe the issue has been weak consumer sentiment rather than high rates."

Kim downgraded six public builders -- D. R. Horton, KB Home, Meritage, PulteGroup, Toll Brothers, and Tri Pointe Homes -- to In-Line from Outperform. Shares of D.R. Horton and PulteGroup, which have the largest market capitalizations of the bunch, were down 5.2% and 4.2%, respectively.

The downgrade was weighing on builder stocks more broadly. The iShares U.S. Home Construction ETF was down 2.1%, on pace for its lowest close since mid-August, according to Dow Jones Market Data.

Investors in builders have been waiting for signs that the group's margins were hitting bottom after sluggish demand and a rise in inventory required the companies to offer more incentives to buyers, or cut prices, to sell homes. Nearly four in 10 builders cut prices in September, while 65% said they used incentives, according to the National Association of Home Builders.

Stable margins are essential for the stocks to command higher price-to-earnings multiples, Kim says. While he says builders still can command higher valuations in the long run, he wrote that "we believe margins must bottom before the stocks can rerate, and we do not believe that this will materialize in the next several months."

"The catalyst to a rerating is when investors have confidence in the sustainable level of operating margins, and this likely will not emerge until Spring '26," Kim said.

Builders have pulled back on construction in recent months. Seasonally adjusted single-family housing starts, a measure of new home construction, fell to their lowest three-month rolling average since May 2023 in August.

Reversing course and leaning into production would result in lower prices, Kim notes, referring to a Sunday post from President Donald Trump on Truth Social that called for big builders "to start building Homes."

"The government's pursuit of supply-side solutions to address housing affordability [...] could lead to unintended consequences for the industry," Kim wrote. "We believe the main problem facing the housing industry is weak demand, not scarce supply, and the most positive outcome for home buyers, homeowners and homebuilders alike would be if the Administration's actions were focused on achieving a narrowing of the mortgage rate spread, not lower home prices."

The mortgage rate spread is the difference between yields on Treasury debt and mortgage-backed securities. The gap is wider than it was before the pandemic, Kim noted. A narrower spread would make home loans less expensive.

"We are alert to the possibility that the government could shift its focus in this direction, but at present, the discussion appears to center around increasing production," he said.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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October 07, 2025 12:05 ET (16:05 GMT)

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