KBW has reweighted its views on two major U.S. homebuilders, moving Lennar Corporation lower in its rankings and lifting Toll Brothers, reflecting what the brokerage describes as an increasingly K-shaped housing recovery.
The firm cut Lennar to Underperform from Market Perform and trimmed its price target to $86 from $97. At the same time, KBW lowered its 2026 and 2027 earnings-per-share forecasts for Lennar by 5%, to $6.05 and $7.03 respectively.
KBW flagged a specific margin challenge tied to Lennar's Millrose land-option arrangement. The brokerage estimates that this structure will create an extra 50 basis points of gross-margin headwind in both 2026 and 2027.
That margin pressure is compounded, KBW said, by Lennar's sales mix: roughly half of the company's volumes are exposed to entry-level buyers. KBW highlighted that affordability constraints, higher mortgage rates and softer consumer confidence are curbing demand among lower- and middle-income purchasers. The firm expects builders serving these segments to continue relying on incentives to move homes, which in KBW's view will limit the pace of margin recovery.
By contrast, KBW raised its target on Toll Brothers to $161 from $158 and upgraded the stock to Outperform. The brokerage pointed to more resilient demand in the luxury segment, a longer-duration land position and greater pricing power at Toll Brothers as the drivers behind the more favorable rating.
KBW projects order growth of 6% to 8% for Toll Brothers in 2026-2027 and anticipates stable gross margins near 26%. The firm attributes this stability to a buyer profile in the luxury market that includes higher credit scores, larger down payments and a greater likelihood of cash purchases.
KBW also observed that Toll Brothers trades at about 1.5 times book value, which it noted is a discount to larger peers despite what the brokerage views as stronger demand and margin characteristics at the company. Combining relative valuation, company fundamentals and prevailing macroeconomic trends, KBW concluded that the investment case favors Toll Brothers over Lennar.
Context and market implications
- KBW's action underscores a growing divergence within the U.S. housing sector between luxury and entry-level builders.
- Sectors affected include residential construction, mortgage finance and consumer discretionary spending tied to housing purchases.
What remains uncertain
- The depth and duration of affordability pressures and elevated mortgage rates that weigh on entry-level demand.
- The extent to which ongoing incentives among lower- and middle-income builders will constrain margin recovery.