Goldman Sachs is still upbeat on the fundamentals of the U.S. housing market, but not enough to keep a Buy rating on one homebuilder's stock. 

The investment bank in a report titled "Summer Slump in Effect" took a rug cutting knife to its rating on PulteGroup (PHM) Wednesday, dropping it to a Neutral from a Buy. Goldman had held a Buy rating on Pulte since December 5, 2019. 

"Although we acknowledge the benefits of Pulte’s strategy as it leverages the strength in demand across products and price points while maintaining its focus on maximizing returns, we believe much of this is reflected in the current valuation," said analyst Susan Maklari in a new research note to clients. "We remain confident the company can deliver against its targeted 10,000+ starts in 2Q, though spec inventory is likely to hold below its 25-30% ideal, as it works through its extended backlog. Additionally, while supply/demand dynamics continue to support pricing, we believe upside to gross margins is captured in investors’ expectations, suggesting a more muted response in the stock."

Pulte's stock fell 2% on the downgrade. 

Year-to-date, Pulte shares are up 26% — that lags the slightly more than 30% gains on rival homebuilders Lennar, D.R. Horton, Beazer Homes and Toll Brothers. Pulte's stock has outperformed KB Home (+22%) and Meritage Homes (+13%) on the year.

Among its coverage list, Maklari rates D.R. Horton and KB Home a Buy. Lennar, Meritage and now Pulte are rated Neutral. High-end homebuilder Toll Brothers is rated a Sell by Maklari and her team. 

Workers construct new Pulte homes in Mesa, Ariz. (AP Photo/Matt York, File)

"Although demand remains well ahead of supply, leaving us positive on the long-term fundamentals, the pace of sales is slowing sequentially, partially driven by builder efforts to manage extending construction cycles and align with starts. As such, we believe the stocks are likely to be range-bound in the near term, as valuations adjust," Maklari cautioned. 

Story continues

The muted assessment on homebuilder stocks by Goldman comes as the housing outlook becomes cloudier with interest rates rising from the lows and builders struggling to build inventory amid labor shortages and inflation in lumber. 

For instance, mortgage applications fell 6.9% from a week earlier the Mortgage Bankers Association said Wednesday. 

"Mortgage application volume fell to the lowest level in almost a year and a half, with declines in both refinance and purchase applications. Mortgage rates were volatile last week, as investors tried to gauge upcoming moves by the Federal Reserve amidst several divergent signals, including rising inflation, mixed job market data, strong consumer spending, and a supply-constrained housing market that has led to rapid home-price growth," said Mike Fratantoni, MBA's senior vice president and chief economist.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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