D.R. Horton (DHI) is facing margin pressures due to rising lot costs and may struggle to pass these costs onto buyers due to affordability challenges and a softer housing market, BofA Securities said in a note Monday.

The company's plans to accelerate deliveries in the second half of fiscal year 2024 may press margins due to higher incentives needed to maintain sales amidst affordability challenges and increased inventory, according to the note.

"We believe D.R. Horton is prudently adjusting to a more challenging backdrop (slowing starts and increased share repurchase), but we expect margin headwinds to persist through fiscal 2025," the firm added.

BofA said that the company's rental inventory is projected to deliver a low single-digit return on equity in 2025, pulling down overall return on equity due to higher interest rates and weaker rental demand.

The brokerage downgraded its rating on D.R. Horton to neutral from buy and reduced the price objective to $150 from $160.

Price: 146.38, Change: +3.46, Percent Change: +2.42