Any investor attracted to Persimmon (LSE: PSN) shares will likely have noticed their recent rebound.
But does that mean the long downtrend is over for the business and the stock? Maybe. But there’s still plenty for investors to consider before buying.
Although horrendous at 7.9%, June’s inflation figure was lower than analysts expected. And it was down from the 8.7% posted in May.
The news was enough to light up the housebuilder sector. And Persimmon wasn’t the only company to see its share price pop up on the news.
Exposed to first-time buyers
But the blips higher are more about investor speculation than actual progress in the underlying businesses. And those piling into housebuilder stocks have been betting that the economic environment will improve for the sector.
It’s a reasonable theory to pursue. Lower inflation may lead to lower interest rates. And that will make it easier for buyers to afford mortgages and buy new homes.
However, Persimmon is particularly exposed to the financial dynamics of consumers. And that’s because the company caters to the lower-priced segment of the new-build market. So most of its customers tend to be first-time homebuyers – those most often reliant on mortgages to finance their purchases.
Meanwhile my colleague Harvey Jones made a good point recently. He observed that the UK property market might have been “seriously overvalued for years”. And that situation arose because of the abnormally low interest rate environment we’ve had.
So there’s a lot of ongoing uncertainty about where the property market will settle now that interest rates are back to levels they’ve been near historically.
It’s not certain they’ll fall back to the lower levels we’ve seen over the past few years. And that’s even if inflation drops to the Bank of England’s 2% target.
Interest rates could remain somewhere nearer to historical levels. And there’s a possibility the housing market could move back to previous levels of affordability – and that’s the elephant in the room for me.
Affordability has deteriorated
According to Schroders, house prices have risen from around four times average earnings in the mid-1990s to over eight times more recently. And that means affordability has deteriorated “dramatically” for first-time buyers.
If affordability normalises like interest rates have for the time being, there may be strong headwinds coming for housebuilder businesses. And there’s a chance that a future government may set policies aimed at making property more affordable.
A quick glance at Persimmon’s share price chart for the past 15 years makes me wonder whether the business has actually enjoyed an unrepeatable bubble.
However, in April the company talked about seeing some signs of improvement in its business during the first quarter of the year. And that came after a challenging fourth quarter in 2022.
The directors said they’re “encouraged” by the early signs of improved customer confidence. And the longer-term demand fundamentals for new homes remain robust.
Meanwhile, City analysts have pencilled in an 11% rebound in earnings for 2024. And set against that expectation, the forward-looking earnings multiple is around 13.
Given the uncertainties in the sector, I think that looks like a fair valuation rather than a bargain one. And I’m not buying the stock for the time being.
