Contractors secure a wall section on a home under construction at the Toll Brothers Cantera at Gale Ranch housing development in San Ramon, Calif.

Bank of America Merrill Lynch downgraded homebuilder stocks Toll Brothers, PulteGroup and NVR and lowered its homebuilding estimates for 2018 and 2019.

"This morning BofA Merrill Lynch's US economics team lowered its 2018-2019 housing starts and new home sales forecasts and thus we slightly temper our macro housing assumptions," analyst John Lovallo said in a note Thursday.

Lovallo downgraded Toll Brothers, PulteGroup and NVR shares to neutral from buy. He also lowered his price target on Toll Brothers to $38 a share from $47. The analyst trimmed his target on PulteGroup shares to $28 from $32 and NVR to $2,850 from $3,060.

NVR shares skidded 3.8 percent, Toll Brothers shares rose 0.4 percent and PulteGroup fell 1.7 percent Thursday.

The downgrades and Bank of America's reduced estimates for housing starts came after the Commerce Department said Wednesday that building permits fell 5.3 percent last month, more than expected.

Analysts at Credit Suisse downgraded homebuilding stocks, along with Home Depot and Lowe's, earlier this week on higher rates hurting housing demand.

Homebuilders have been under pressure in October. The iShares U.S. Home Construction ETF (ITB) is down more than 11 percent for the month. This sharp drop coincides with a surge in interest rates. The 10-year note yield hit its highest level since 2011 last week.

Bank of America now expects housing starts to total 1.26 million this year and 1.3 million next year.

Lovallo said Toll's valuation may be too high, given some moderation at the high end of the housing market.

"While TOL has executed well and is moving down market with more affordable product, its average selling price remains well above peers," he said. "We believe a lower valuation multiple is warranted given potential absorption risk and deteriorating market sentiment, particularly as it relates to interest rate and affordability headwinds."

As of Wednesday's close, Toll Brothers' stock had fallen more than 5 percent this month and more than 25 percent this year.

Lovallo said growth for PulteGroup could be challenging heading into 2019 because of the company's strategy to drive down prices "coupled with a greater mix of product at move-up buyer price points." He said NVR's exposure to slower-growing markets like the mid-Atlantic "could present a headwind for the stock."

To be sure, Lovallo said he is still "constructive" on U.S. homebuilders, "particularly those focused on affordable entry-level/first time homes."