The U.S. housing market has been red-hot since the Federal Reserve cut interest rates to zero back in March 2020. Yet one Wall Street analyst said Tuesday that some homebuilder stocks are better than others heading into 2021.

The Homebuilder Analyst: BofA Securities analyst John Lovallo has issued the following homebuilder stock rating changes:

• Armstrong World Industries Inc AWI upgraded from Neutral to Buy, price target raised from $84 to $89.
• PulteGroup, Inc. PHM downgraded from Neutral to Underperform, price target cut from $50 to $48.
• M.D.C. Holdings, Inc. MDC downgraded from Buy to Neutral, price target cut from $59 to $58.

The Homebuilder Thesis: Lovallo said the housing market remains strong in 2021, but investors should be prepared for multiple sentiment headwinds for homebuilder stocks.

Rising housing prices have created concerns over affordability, the analyst said. In addition, homebuilders are approaching extremely difficult 2020 comps.

The sector will likely still generate year-over-year earnings growth in 2021, but investors should expect that growth rate to start to drop, he said.

Stock selection will be key within the housing space, Lovallo said. 

“We believe building product stocks are somewhat better positioned than homebuilders from at least a sentiment standpoint, given exposure to generally more stable repair & remodel (R&R) activity and the expected catch-up in housing starts relative to new home sales.” 

Lovallo named Armstrong as his top building products stock pick and D. R. Horton Inc DHI as his top homebuilder stock pick for 2021.

For D.R. Horton, Lovallo said the company’s focus on entry-level and first-time homebuyer markets coupled with its long track record of strong execution position it well to continue to work in the coming year.

Benzinga’s Take: The housing market won’t stay hot forever, but low mortgage rates and a macroeconomic recovery scenario have created a great landscape for homebuyers.

The potential upside for homebuilder stocks may come down to just how high investor expectations are in the coming quarters.