Berkshire Hathaway, of which Warren Buffett is the chairman, CEO and largest shareholder, has filed its latest Form 13F. The document often creates a stir as it reveals what the world’s most famous investor has been buying and selling.
The most recent publication shows that Buffett has acquired stakes in DR Horton, NVR and Lennar, three US housebuilders, at a total cost of $814m. Although this is a relatively small sum for a company with net assets of over $1trn, it would appear as though the 93-year-old American (or his team) believes the sector currently offers good value.
Just like on this side of the Atlantic, the US housing market is struggling. Higher interest rates are increasing the cost of mortgages and squeezing disposable incomes.
But it looks as though the brains at Berkshire Hathaway think the bottom of the market is either here, or not too far away.
Domestic focus
The share prices of the UK’s biggest housebuilders have taken a battering in recent months. I should know as I own a small piece of one of them, Persimmon (LSE:PSN).
Its shares have fallen 66% since September 2021.
Those of the other builders in the FTSE 100 — Barratt Developments and Taylor Wimpey — have suffered similar fates, both crashing 40% over the same period.
Bad news
Persimmon has suffered the most as it sells cheaper properties that appeal more to first-time buyers. The government’s Help to Buy Scheme, which accounted for over a third of its sales, closed to new applicants on 31 March 2023.
For the first six months of 2023, the company’s margin was 9.5 percentage points lower than for the same period in 2022.
This is an enormous reduction. And based on an average selling price of £256,445, means it’s making £24k less profit per house.
Inflation and the introduction of additional sales incentives account for the majority of the collapse in margin.
Green shoots
Although a recovery in the housing market is not guaranteed, we have been here before. Every decade since the 1970s has seen a downturn at some point. And the market has always bounced back.
With a general election not too far away, I’m confident that all of the major political parties will soon start promising new schemes to help younger voters get on the housing ladder. This could be the kickstart that the sector needs.
And I don’t think the shares of the UK’s largest housebuilders can get much cheaper.
They each have a price-to-earnings (P/E) ratio of between four and six. This compares favourably to those of DR Horton (8.3), NVR (13.0) and Lennar (7.3).
And the collapse in their share prices, means their yields are well above the FTSE 100 average.
| Stock | Dividend yield (%) | P/E ratio |
| Taylor Wimpey | 8.5 | 5.9 |
| Barratt Developments | 8.5 | 5.3 |
| Persimmon | 6.0 | 4.1 |
But I don’t think there will be a quick recovery. The UK economy is teetering on the edge of a recession. And the battle with inflation has not yet been won.
However, I think interest rates are currently near their peak and all of the industry’s bad news is out in the open.
I can see why Warren Buffett thinks now is a good time to buy into the sector. If I didn’t already own shares in Persimmon, I’d be happy to include them in my portfolio. I think they currently offer the best value of the three Footsie builders.
