With falling house prices hitting the headlines again, one Fool turns to the house builders for guidance.
As the fortunes of Britain's biggest house building companies appear to be closely correlated to the health of the economy, it is unsurprising that these companies, and their share prices, have been suffering in recent years.
Many have been battening down the hatches, trying to reduce debt and focus on profit rather than volume of sales, as credit markets have dried up and demand for new houses has reduced. There has been extensive dividend slashing, and some have even raised more cash by issuing new shares, thus diluting investors' interests in the process.
House prices
House builders are what Peter Lynch would describe as cyclical companies whose profits cycle up and down as demand is affected by the peaks and troughs of the credit and business cycles. Investors could be forgiven for thinking that it might be a good time to invest in them now, as their share prices may be reflecting the nadir of their cycle of earnings.
However, the situation is complicated, as house prices appear to remain stubbornly high despite the dearth of mortgage availability in recent years, and any future slump in house prices could negatively influence the house builders' profits.
Admittedly, inflation is relentlessly eroding the real value of house prices, but nevertheless, the pricing of houses is subject to the normal constraints of supply and demand, and if anything happens to affect that, like rising interest rates for example, perhaps we could see house prices falling along with the house builders' share prices.
Outlook
I've been looking at the recent outlook statements from some of Britain's biggest house builders to see what they think about their immediate and longer-term prospects.
In its half-year report released on 24 August, Persimmon (LSE: PSN) said this:
The availability of mortgage credit continues to be constrained. Mortgage lenders remain cautious in their risk appetite but are increasingly supportive of new home purchasers. The clarification of the details of the Coalition Government's spending plans to be announced in October will create greater certainty which may help to improve sentiment further within the UK housing market. We expect annual volume growth of new home sales to continue to be steady in line with any general improvement in the economy.
Previously, in a trading statement released on 14 July, Barratt Developments (LSE: BDEV) said:
The outlook for the new housing market in the UK is likely to remain challenging as a result of continued constraints on the availability of mortgage finance and overall economic concerns.
And Taylor Wimpey (LSE: TW) said this on 3 August in its half-year results statement:
The UK housing market has remained relatively robust during the first half of the year, despite the market uncertainties arising from the General Election and the wider economic environment. Against this backdrop, we have continued to run the business on a cautious basis...
This was followed by Bellway's (LSE: BWY) trading statement released on 5 August:
In the calendar year 2010 to date, the market would appear to have returned to its more usual profile of a spring peak followed by a quieter summer period. Concerns still exist in the wider economy...
Caution
The general 'flavour' appears to be 'caution all the way' as the builders wait for economic recovery. They certainly do not appear to be ruling out further trouble ahead, particularly in the short term, despite posting a return to modest profitability now.
It has undoubtedly been a tough market for those making their living by building houses, as reflected in the companies' share prices. That could mean that the shares may make a good investment now, if there are to be better earning times ahead. However, the spectres of high house prices and low interest rates continue to overshadow any assessment of the situation, creating uncertainty.
That's often as good as it gets with investing; if we had certainty, we would probably have higher share prices with most of the big gains behind us.
You pay your money and take your choice, but I certainly wouldn't buy any building company shares without further analysing the value inherent in each individual business as it stands now.
More from Kevin Godbold:
Kevin owns shares in Persimmon and Taylor Wimpey.
