NVR Inc. (NVR) picked up a downgrade from Bank of America on Friday, and it wasn't the gentle kind. The bank warned that weakening homebuyer demand, rising construction costs and pressure on profit margins could weigh on the homebuilder's earnings through 2027.

Analyst Rafe Jadrosich moved NVR from Buy to Underperform and lowered his price forecast to $5,900 from $6,725. He pointed to disappointing third-quarter results, slowing sales in key markets and a valuation that still looks rich despite deteriorating fundamentals.

Buyers Are Backing Away

NVR reported third-quarter earnings of $89.45 per share, about 12% below Bank of America's forecast of $101.53. New home orders fell 7% year over year to 4,391, missing the firm's estimate by 14%. The average selling price of new orders declined 4%. Homebuilding revenue dropped 8% to $2.35 billion, while home deliveries fell 7%.

What worries Jadrosich most is where the weakness is showing up. NVR's core Mid-Atlantic markets have historically been a source of competitive advantage. Now they look soft. Philadelphia and Richmond slipped 10 and 13 positions, respectively, in Bank of America's September housing market rankings. Baltimore and Virginia Beach also showed signs of weakness. Mid-Atlantic orders declined 4%, while orders per community plunged 19% year over year.

The analyst said the slowdown was particularly concerning because NVR had previously maintained stronger sales momentum than many competitors.

Costs Keep Climbing

Bank of America expects additional pressure on NVR's margins as the company adjusts home prices to attract buyers while facing higher land, labor and construction costs. NVR's adjusted homebuilding gross margin contracted 246 basis points year over year to 19.3% in the third quarter. Its homebuilding operating margin fell 322 basis points to 13%.

Jadrosich warned that weaker sales could force NVR to offer more competitive pricing to maintain its home delivery schedule. The company's business model relies on options to purchase developed lots, which could create pressure to sustain sales volumes as land purchase commitments come due. Meanwhile, higher lumber and transportation costs, along with persistent shortages of finished lots, could further weigh on profitability.

NVR's vertical integration could also expose it to rising construction material costs earlier than some competitors. Labor shortages have added another challenge. The company's backlog conversion rate declined to about 48% from 56% a year earlier.

Estimates Cut, Buybacks Expected to Slow

Bank of America lowered its 2026 and 2027 earnings estimates by 5% and 10%, respectively. The firm now expects earnings of $345.39 per share in 2026 and $357.42 in 2027.

Jadrosich also expects NVR's share repurchases to slow as weaker earnings and declining cash reserves limit its ability to sustain aggressive buybacks. The company repurchased approximately $2.1 billion in shares in 2024 and $1.8 billion in 2025, exceeding its free cash flow in both years. Bank of America forecasts repurchases of $1.4 billion in 2026, followed by $1.1 billion annually in 2027 and 2028.

The analyst also warned that stock-based compensation expenses could increase in 2027 if NVR resumes its traditional four-year stock option grant cycle.

The Valuation Still Looks Full

Jadrosich said NVR's valuation has become harder to justify as earnings expectations weaken. Bank of America's 2026 and 2027 earnings forecasts have declined 25% and 33%, respectively, since the beginning of the year. However, NVR shares have fallen only 16% over that period. The stock trades at approximately 17 times projected 2027 earnings, above its historical average.

The revised $5,900 price forecast is based on 16.5 times estimated 2027 earnings, down from the firm's previous valuation multiple of 17 times.

Despite acknowledging NVR's strong market position and operating history, Jadrosich remains cautious until demand, land costs and profit margins show clearer signs of improvement.

NVR Price Action: NVR shares were down 0.81% at $6,060.96 at the time of publication on Friday, according to market data.