A once-in-a-decade chance to buy Persimmon shares near a 10-year low?

Persimmon shares have fallen 70% from their 2020 peak as soaring mortgage rates hurt the FTSE 100 housebuilder. Is this a rare chance to buy the dip?

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Persimmon (LSE:PSN) shares are trading below £10 again after briefly falling below this critical threshold in July. We would have to cast our eyes back to early 2013 to find the last time the FTSE 100 stock was changing hands at these levels.

Rising mortgage rates have put pressure on housing affordability for millions of Brits and the UK’s second-largest housebuilder is suffering amid the fallout. With the company’s market cap now at £3.17bn, there’s mounting speculation that it could be demoted from London’s premier index.

So, is Persimmon an investment to avoid, or could this be a rare opportunity to buy cheap shares? Here’s my take.

Cracks in the housing market

It doesn’t take an eagle-eyed investor to notice the Bank of England has consistently hiked the base rate for over a year. As the battle to control inflation continues, mortgages are now more expensive than at any point since 2008.

That has made life especially difficult for prospective first-time buyers — the majority of Persimmon’s customer base. As this group tends to take out larger loans than other mortgagors, higher borrowing costs have a particularly acute effect on their ability to get onto the housing ladder.

As a result, the company’s construction activity has reduced significantly. In H1 2023, Persimmon built 4,249 homes. That’s a 36% fall from the 6,652 it completed in H1 2022. And the bad news doesn’t end there. Pre-tax profit fell 66% to £151m and the dividend per share has taken a mighty hit, down 82% to 20p.

The route to recovery

With the risk of relegation to the FTSE 250 index on the near horizon, shareholders will be eagerly looking for reasons to be optimistic about the long-term future for the Persimmon share price. A rebound is far from guaranteed, but I think there are some glimmers of hope despite challenging trading conditions.

The company’s private sales rate is one silver lining. Persimmon’s private forward order book is 83% higher than it was at the beginning of the year. As these properties tend to be higher in value, this positive momentum is encouraging.

In addition, underlying first-time buyer demand remains robust, although it’s currently suppressed by squeezed borrowing power. Skyrocketing rents, Britain’s chronic housing shortage, and a longstanding cultural affection for property ownership all create the conditions for a long-term recovery in Persimmon shares.

Indeed, if interest rates fall faster than expected, the housebuilder would likely stand to benefit as borrowing costs ease. However, that eventuality is difficult to predict with any degree of certainty. Much will depend on the inflation numbers over the coming months.

A value investment opportunity?

Persimmon shares face serious near-term challenges. It’s hard to escape the conclusion that the company could continue to suffer, especially if mortgage rates remain elevated.

Longer-term, I’m more optimistic. If I had spare cash, I think today could be an attractive entry point to buy the shares. However, I wouldn’t be surprised if my investment took a while to generate attractive returns.

Plus, I already own Taylor Wimpey shares. Accordingly, I wouldn’t invest too much in Persimmon as I don’t want to be overly exposed to a sector that faces multiple headwinds at present.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has positions in Taylor Wimpey Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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