04:47 PM EST, 12/16/2024 (MT Newswires) -- Certain US homebuilders' gross margins will likely be under pressure heading into 2025 amid higher incentives on entry-level spec homes and persistent land inflation, BofA Securities said Monday.

The brokerage's recent webcast on the US housing market with Zonda Chief Economist Ali Wolf indicated that entry-level is the weakest segment nationally, incentives remain high, and homebuilders are "slightly more cautious" on land acquisition amid higher lot costs. Zonda provides data to homebuilders.

Demand trends have yet to improve meaningfully after slowing down in September and October, BofA said, citing a survey by Zonda. "Despite the soft near-term trends, builders generally are optimistic that there is pent up demand and traffic will improve in the spring," BofA analyst Rafe Jadrosich said in a note to clients.

Some homebuilders indicated that following a slow start to November, demand seemed to improve mid-month following the US presidential election. The webcast with Wolf also suggested that resale inventory is increasing in certain markets and that homebuilders have not pulled back on incentives or rate buy-downs mainly due to a rise in spec inventory, according to the note. A spec house is built without a specific, individual buyer in mind.

The brokerage reduced its respective price objectives on the stocks of D.R. Horton ( DHI ) , PulteGroup ( PHM ) , Dream Finders Homes ( DFH ) , KB Home ( KBH ) , Lennar ( LEN ) and Smith Douglas Homes ( SDHC ) .

The firm reiterated its buy ratings on D.R. Horton ( DHI ) and PulteGroup ( PHM ), citing relative upside potential to its price objectives and more aggressive capital returns to shareholders versus other homebuilders. BofA reiterated its neutral ratings on Dream Finders, KB Home ( KBH ), Lennar and Smith Douglas Homes, citing a balanced risk-reward point at current valuation.

NVR (NVR) and Toll Brothers ( TOL ) are seen as the best performers, according to the note.

NVR is likely well-positioned compared with other builders amid its concentration in the US Mid-Atlantic, Midwest and Northeast, where resale inventory is low and home prices are rising, Jadrosich said. The company is one of the few homebuilders with potential margin expansion in the first half of 2025.

Toll Brothers' ( TOL ) is benefiting from the luxury and move-up segment's outperformance versus entry-level, and signs that its buyers are less rate-sensitive, according to BofA.