03:33 PM EDT, 09/19/2024 (MT Newswires) -- Declining mortgage rates bode well for homebuilders, with potential for improvement in both sales and margins likely, BofA Securities said Thursday.

Over the past two months, mortgage rates have declined sharply, which should help improve homebuilders' sales or margins or both, the brokerage said in a note to clients.

The firm's mortgage-backed securities team expects a year-end mortgage rate between 5.75% and 6%, compared with 6.20% currently, according to the note.

On Wednesday, homebuilder stocks closed "flattish," while mortgage rates seemed relatively unchanged after the Federal Reserve reduced its benchmark lending rate by 50 basis points, BofA analyst Rafe Jadrosich said. "We believe homebuilder stocks and mortgage rates already anticipated rate cuts following (a) rally in recent months."

Falling mortgage rates are likely to boost housing demand, but "the magnitude will be important," the analyst wrote. Although homebuilders have boosted shareholder capital returns notably, there's still "significant capacity" for further buybacks given their strong balance sheets and better free cash flow, according to the note.

"Public homebuilders are well-positioned to take market share from private builders that face significant soft cost headwinds from a spike in construction and land development loan financing costs," Jadrosich wrote. A continued weakening of the job market could pressure housing demand, which needs to improve to justify homebuilders' currently "elevated" valuations, the firm said.

Lennar ( LEN ) is scheduled to report its fiscal third-quarter financial results after Thursday's closing bell, with BofA projecting earnings at $3.62 a share, compared with Wall Street's $3.65 view. The company's orders could be weighed down by "a weaker" demand backdrop in June and July, according to the note.

KB Home ( KBH ) is expected to post fiscal third-quarter EPS of $2.03 on Sept. 24, compared with the Street's $2.06 estimate, Jadrosich said. BofA sees potential upside to the company's gross margin guidance for the quarter. "Full-year gross margin outlook could also prove conservative given (third- and fourth-quarter margins) are typically higher than (the first half) due to fixed cost leverage."

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