Several housebuilder stocks have enjoyed an unexpected recovery in recent months. That’s not to say they’re not down over a year or two, but there’s been some upward movement since January.
So why do I think investors should be piling into these stocks? Let’s take a closer look.
Improving conditions
Yes, interest rates went up again last week. However, we’re near the peak of the cycle and as investors we need to be looking at least six-to-nine months into the future.
But we’re already seeing some positive indicators. In their most recent results, the three biggest developers, Barratt Developments, Persimmon and Taylor Wimpey, noted that sales figures were improving while house prices weren’t declining as anticipated.
And following seven consecutive months of house price declines, Nationwide said that house prices had actually ticked upwards between March and April.
This is considerable turnaround from what the market had expected. Analysts suggested house prices could fall by as much as 20%, while inflation would send building costs soar.
Valuations
Valuations within the sector are incredibly low. Naturally, this reflects a booming trade last year, and the expectation that 2023 was going to be much, much worse.
For example, Persimmon trades for just 5.2 times earnings. That makes it one of the cheapest stocks on the FTSE 100. In fact, the housebuilder which traditionally trades at a premium to its peers, is currently trading near a 10-year low.
Persimmon has perhaps fared worse than some of its peers after it elected to cut its 2022 dividend following a higher than expected ‘fire safety pledge’.
But even the firms that as somewhat insulated from the private market challenges — those with affordable housing businesses — are trading at low multiples. Vistry Group, one of my favourite builders, trades for just 5.6 times earnings.
What’s next?
Evidence suggests there is arguably more balance between supply and demand in the housing market than there has been for some time. And this is reflected by recent resiliency in house prices.
So what’s coming? Well, an assumption is that the macroeconomic environment will improve. Inflation data is also expected to improve significantly in the coming months — primarily because April and May 2022 were a high starting point for year on year inflation growth. This should play into falling interest rates and increased availability of mortgages in H2.
Last month, HSBC reiterated the challenges the industry was facing, but suggested that the sector’s downturn has been more than priced into shares.
“We now have greater visibility about the shape of the current housing market downturn for the housebuilders’ profits and cash flows and their recovery from it, which we believe to be more than priced-in to share prices“, the bank said.
So what does this mean for investors? Well, personally, I’m taking the chance to top up on some of my favourite housebuilders. I’m buying Vistry, because of the security the partnerships business provides — Bellway has a sizeable, affordable homes business too — but I’m also taking a chance on premium builder Crest Nicholson.
Both of these stocks also offer attractive dividends — 7.1% for Vistry and 6.6% for Crest. Amid an improving market, these yields look a lot safer than some expected.
