The prospects for FTSE 100 index housebuilders such as Persimmon (LON: PSN) and Barratt (LON: BDEV) have worsened since the start of the year. Rising interest rates and a cost-of-living crisis have contributed to falls in their share prices of 28% and 38%, respectively, year-to-date. Uncertainty regarding the ultimate cost to replace cladding on apartment buildings has also acted as a drag on the wider sector.
While further share price volatility cannot be ruled out in the short run, both companies have sound financial positions, low valuations and could benefit from ongoing supply/demand dynamics in the housing market. As a result, they could prove to be good value long-term buying opportunities.
Few investors predicted that house prices would surge during the pandemic. However, they have risen sharply, with the Halifax house price index last month reporting its tenth consecutive monthly increase. This is its longest ‘winning streak’ since 2016.
Looking ahead, the housing market’s prospects continue to be highly unpredictable. The house price crash that is now being forecast to take place by many commentators is, therefore, not guaranteed. Although interest rates have risen, and are likely to continue to increase due to high inflation, they started from an extremely low base and remain at historically low levels. With mortgage availability remaining relatively high, demand for new homes could be more robust than the recent share price performances of housebuilders suggests.
Moreover, due to the continued imbalance between demand and supply that has been present in the housing market for a significant period of time, house prices could be less affected than widely anticipated by an uncertain economic environment. Even if they experience a period of decline, factors such as population growth and planning issues may mean that they ultimately continue their upward trend in the long run.
This could mean that Persimmon and Barratt’s share prices are undervalued at the present time. Their forward price-to-earnings ratios of 8 and 6, respectively, appear to include wide margins of safety that suggest they offer good value for money.
Financial and market positions
Even if demand for new homes declines heavily and house prices fall, both companies appear to have the financial means to ride out industrywide uncertainty. For example, Persimmon has a net cash position that is in excess of £1.2 billion, while Barratt expects to end its 2022 financial year with a net cash position of at least £1 billion.
These figures show that both companies are likely to emerge from any industry downturn in a strong position relative to their peers. They may even be able to improve their competitive positions, such as through purchasing land at more attractive levels. In addition, their solid cash positions may mean they are able to maintain generous levels of shareholder payouts that mean they offer dividend yields of 11% (Persimmon) and 6% (Barratt) at current share price levels.
Undoubtedly, investors in both companies will need to accept that their stock prices could prove to be highly volatile as an uncertain economic period likely continues. However, their low valuations suggest that investors have already factored in a challenging near-term outlook, while their financial positions highlight their ability to capitalise on the housing market’s supply/demand dynamics over the long term.