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Investing.com --  Analysts at J.P. Morgan said they were adopting a more cautious stance on U.S. homebuilders for 2025, amid a challenging demand and supply environment, margin pressures, and full valuations. Brokerage downgraded key stocks in the sector on expectations of slowing earnings growth.

J.P. Morgan downgraded D.R. Horton Inc (BVMF:D1HI34) to "underweight" from "neutral," as it expects stock to underperform relative to peers.

Toll Brothers Inc (NYSE:TOL) and Meritage (NYSE:MTH) Homes were also cut to "neutral" from "overweight."

Whereas, brokerage upgraded Century Communities (NYSE:CCS) to "neutral" from "underweight", while maintaining "overweight" ratings on PulteGroup Inc (NYSE:PHM) and Taylor Morrison (NYSE:TMHC) Home.

The analysts see little improvement in major housing demand drivers, including interest rates, employment growth, and affordability.

Supply conditions are also expected to normalize, with existing home coming to typical levels and new home availability increasing, weighing on home prices, which were projected to remain flat or only slightly up next year.

There is also a chance that Trump administration policies could potentially disrupt housing’s labour force, as immigrants account for the largest percentage of U.S. construction workers since 2004.

Valuations in the sector are stretched, with both price-to-earnings and price-to-book ratios hovering near mid-cycle levels. Brokerage lowered its price targets for homebuilder stocks by an average of 10%, reflecting reduced expectations for sector upside in the coming year.

Homebuilders saw volatility in 2024, driven by swings in Treasury yields and mortgage rates. Following a strong finish in 2023, builder stocks softened in the first half of 2024 before rebounding sharply in the third quarter.

But the recent pullback has stoked concerns as rates reversed course and fundamentals continue to moderate.

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