High Grade Homebuilders Overview: Built different: Improved credit profiles support cycle resilience. Top pick OW DHI

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High Grade Homebuilders Overview: Built different: Improved credit profiles support cycle resilience. Top pick OW DHI

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PHM: Pulte Groupreflects the improved credit quality across the sector and growing investor confidence in

TOL: Toll Brothersbuilders' ability to operate in a sustained high-rate environment. While spreads have

GFC: Great Financial Crisishistorically tracked changes in mortgage rates closely, we believe the relationship is

OW: Overweightweakening as builders exhibit fundamental resilience under elevated rates. We view rate

UW: Underweightvolatility as the more important driver of sector spreads. Notably, homebuilder spreads

MW: Marketweighthave yet to fully retrace their Iran war-related widening from early March despite

volatility returning towards 18-month lows, suggesting current levels are somewhat

cheap. With our Rates Research team (see report) expecting volatility to remain subdued

over the next 6-12 months, we believe Homebuilder spreads (at a sector level) could

grind modestly tighter going forward, provided housing fundamentals remain stable.

Improved credit profiles with durable long-term tailwinds

The key difference between today's homebuilders and prior cycles is credit quality.

Following the GFC, management teams de-levered balance sheets, adopted more

disciplined capital allocation policies, and shifted toward asset-light land strategies that

improve capital flexibility. Industry consolidation has also improved supply discipline and

pricing power, with the largest public builders accounting for a significantly larger share

of new home deliveries than prior cycles. The result is a sector that operates with lower

leverage, stronger liquidity, and materially higher credit ratings than in the past, helping