The Taylor Wimpey (LSE: TW) share price is down 7% on Monday at the time of writing, having dipped to 96p.
It’s all about rising interest rates, and the plunging pound after new chancellor Kwasi Kwarteng’s so-called mini-budget.
Sterling has slumped to an all-time low against the US dollar. And there are rumours going round of a surprise special meeting at the Bank of England that could bring about an emergency interest rate rise. Some are even talking of a full 1% hike, on top of last week’s 0.5%.
Housebuilder falls
No wonder housebuilder shares are taking a bit of a beating. But what do long-term investors do when our favourite shares are falling? We buy, of course. So should we buy Taylor Wimpey shares now?
We heard on the same day that asking prices in the property market continue to rise. According to Rightmove, the average price on a new-to-market home rose by 0.7% between August and September.
The chancellor has also raised stamp duty thresholds. First-time buyers can now go up to £425,000 without paying it. And for those who have made previous purchases, the threshold has been doubled to £250,000.
Effects
What do all these potential influences on house prices and on the property market mean for housebuilders?
In the long term, I think the answer is not very much. In the short term, weaker demand could reduce revenues. And falling selling prices (should we see them) could put a squeeze on margins — but that depends on total build costs, including the costs of land, materials and labour.
Right now, inflation has pushed up materials costs, so I can see a reason for a decline in housebuilder shares. But do current conditions justify a 40% fall for the Taylor Wimpey share price over 12 months?
Shares oversold?
I reckon the market reaction is overdone. And history supports that feeling. Whenever we fear a softening property market, investors desert the sector and prices fall. But every time that’s happened, they’ve come bouncing back in subsequent years.
In the first half of this year, Taylor Wimpey enjoyed an operating margin of 20.4%, and it was growing. I think there’s room there to handle a bit of short-term bearishness with no lasting harm.
Interestingly, the company also reported a tangible net asset value of 120p per share. So with the shares at 96p, the company is valued at a good bit less than its tangible net assets. The market is putting a negative value on the business itself. Is the long-term business, which generates strong cash flow, really worth less than nothing?
Short-term risk
The risk is that profits will be squeezed for a couple of years, and dividends will have to be cut. And last time we had a sector slump, it took a little while for a recovery to kick in.
But with a forward price-to-earnings (P/E) multiple of only around 5.5, I think all the bad news and more is already built into the Taylor Wimpey share price.
If I didn’t already have a signifiant portion of my investments in Persimmon, Taylor Wimpey would be near the top of my buy list for sure. Actually, it might still be.
