As 2022 draws to a close, I am scouring the FTSE 100 for bargains to buy in 2023. One sector that has really taken a beating is housebuilders. Today, I can pick up shares in Taylor Wimpey (LSE: TW) at a 44% discount from the beginning of the year. Does that make them a no-brainer buy?
Tough trading conditions
Housebuilders are cyclical businesses. Therefore, when I am considering whether to invest my hard-earned money in the industry, I cannot ignore the wider macroeconomic environment.
Taylor Wimpey shares are trading at a very attractive price-to-earnings ratio of six. That is significantly below the FTSE 100 average. But there are clear reasons for this.
At its half-year results in August, the company reported that build cost inflation on legal completions stood at 10%. But on the other hand, house price inflation was healthy. A pandemic-driven shift in housing preferences together with a low interest rate environment kept transaction demand high.
However, over the last couple of months we have started to see the first cracks develop in the housing market with prices falling 2.3% in November. Rising interest rates is translating into less buyer interest.
2023 forecast
No one knows for sure which direction house prices are heading for in the New Year. There are simply too many unknown variables at play. Lloyds, the UK largest mortgage lender, is predicting a fall of 8%.
Such a fall, although not insignificant, merely puts house prices back to April 2021. In other words, it would only reverse some of the gains seen during the pandemic. I could easily make a case that such an 8% fall is too conservative.
Today’s housing market dynamics are totally different to what they were 20 months ago. A stamp duty holiday together with a help to buy scheme and 95% loan-to-value mortgages, fuelled a meteoric rise. Such blow off tops are not uncommon at the peak of a business cycle.
Housing market assessment
US and UK central banks have made it clear that their number one priority is to bring inflation down. The pace of interest rate hikes have been so aggressive this year that it has caught the market by surprise.
This month, the Bank of England raised interest rates by 50 basis points, instead of 75. Several analysts have seen this as a positive move and a sign that the worse could be over. But the hard data is telling us that we are entering a recession.
The annual unemployment rate in the UK currently stands at 3.6%. But unemployment is a lagging recessionary indicator. By 2024, it is expected to rise to 5%.
At the moment, we have a standoff between buyers and sellers. Buyers cannot afford to pay the asking price because mortgage costs have risen and prices have not come down enough to reflect this new reality. Sellers are not willing to lower their asking prices because, at the moment, they are not forced to. Something, eventually, has got to give.
Of course, I could be wrong in my assessment. If the UK does avoid a painful, protracted recession, then Taylor Wimpey’s share price is clearly a bargain. However, it is a risk I am simply not willing to take.
