The Persimmon (LSE:PSN) share price hasn’t fallen below £10 in over a decade. But it did just that in recent days.
Predominantly, fears of a housing downturn have punished this housebuilder. Just a few years ago, its share price traded at over £30 a share.
There are legitimate concerns surrounding the property market, given the sharp change in borrowing costs over the past year. But is it now time for savvy investors to pick up a bargain?
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Let’s take a look.
A rocky housing market
From 2009 to 2021, the average Bank of England base rate of interest was 0.5%. Low borrowing costs and government-led schemes like Help to Buy raised UK property prices during that period.
For housebuilders, that was good news. Indeed, it was profitable time to be a Persimmon shareholder. I used to be one.
But much has changed in the past year or two. Interest rates and mortgage costs have moved sharply higher in response to soaring inflation.
Borrowers are finding it much more expensive than in recent years. And as properties become less affordable, it could result in falling house prices.
Indeed, the average price of a UK home fell 2.6% year on year last month according to Halifax. If this continues for several years, it could become a concern for Persimmon.
Under such an environment, why would I even think about investing in Persimmon shares?
Cheap Persimmon shares?
Well, the stock market is forward-looking. And the Persimmon share price is no different. Having fallen by around 65% since interest rates started to rise, its shares now appear cheap.
Its price-to-earnings ratio of 11 is low compared to its 10-year average. That, alongside a chunky 6% dividend yield has got me interested.
Persimmon is a profitable housebuilder with a double-digit return on capital employed. Along with a rock-solid balance sheet, I consider it to be a good quality share.
Looking ahead
Stock market investors might want to look ahead and try to anticipate the future direction of inflation and interest rates. As they were key factors in tumbling housebuilder shares, they could also lead a recovery.
The Bank of England Governor expects inflation to fall significantly by the end of the year as food and energy bills drop.
That suggests that at some point, interest rates will stop rising. My guess is that will be in 2024 at the latest.
As the stock market is forward-looking, all the bad news could already be priced into Persimmon’s share price.
As such, it seems a reasonable point to dip my feet in the water and buy some shares.
Steady but not booming
It’s worth noting that I don’t believe the housing market is about to launch into another decade-long boom. The ultra-low interest rates that propelled house prices over the past decade may not return for some time.
That said, the UK is still in a long-term housing crisis where demand far exceeds the supply of new homes. This bodes well for the UK’s leading housebuilders, including Persimmon.
Overall, I believe this stock offers good value at the current price. That’s why I expect to buy some shares as soon as I have some available funds in my ISA.
