Taylor Wimpey (LSE: TW) shares are down 25% this year, with its peers also suffering similar declines. Housebuilder shares have taken a substantial hit this year as the Bank of England continues to raise interest rates. So, here’s why the Taylor Wimpey share price is tumbling.
Taylor Wimpey loses interest
Last month, the UK central bank opted to continue its rate hikes, bringing interest rates to 1%. Consequently, the mortgage rate has spiked to 4.1%, having spent the majority of last year at 3.6%. Worries that higher interest rates could result in a house market crash have spooked Taylor Wimpey investors into a sell-off.
Both Halifax’s and Nationwide’s data continue to show that house prices are on the rise. However, both companies have forecasted a cooling of house price growth as we head into winter. In fact, the cracks are already starting to mount. Since the second half of April, around one in 20 properties have had price reductions of 5% or more. This is an increase from one in 22 properties from March, sending the Taylor Wimpey share price lower.
Despite the expected cooldown in house prices, Taylor Wimpey can only grow so much. Management mentioned that output of houses have taken a setback due to expensive raw materials and supply chain bottlenecks. Moreover, higher inflation and a low unemployment rate is putting pressure on profit margins. This was evident in the FTSE 100 firm’s FY2021 results, as profit margins decreased 2.5% from two years ago. That being said, Taylor Wimpey provided a positive set of guidance for the year ahead.
Whilst interest rates have risen, they remain at historically low levels and, with good availability of competitively priced mortgages, we are experiencing strong levels of customer interest.Source: Taylor Wimpey 2022 Annual General Meeting
Tough as bricks?
Even though scepticism fills the air around housebuilder shares, I think there might be a buying opportunity for me here. For one, renowned real estate agent Jeremy Leaf said, “Activity in the market at the moment is more determined by a shortage of stock rather than a softening of demand being prompted by the cost-of-living crisis.” This gives me reason to believe that house prices may just hold its weight despite a slow down in price growth.
Aside from that, Taylor Wimpey shares are also very cheap currently. The stock boasts an excellent price-to-earnings (P/E) ratio of 8, making it cheaper than the market average of 15. The British housebuilder also has one of the better dividend yields in the FTSE 100 index, at 6.6%. Paired with a flawless balance sheet, Taylor Wimpey’s fundamentals are extremely solid.
Nevertheless, I am wary that the Taylor Wimpey share price could continue to drop. The Bank of England forecasts an economic contraction to occur later this year, which will not do house prices any favours. Therefore, although there’s strong upside potential, Taylor Wimpey shares are too big of a risk for me to take, and I won’t be buying them right now. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more financial security in a potential stock market crash.