The Persimmon (LSE:PSN) share price has taken a huge hit in recent years. The stock has slumped on the back of worsening macroeconomic conditions, costly fire safety pledges, and the removal of the help-to-buy programme.
Pain coming to an end?
Unfortunately, there’s little sign macroeconomic conditions will improve considerably in the coming months. UK home sales are expected to dip to levels not seen since 2012 according to Zoopla data released on 30 August. Transaction volumes are falling and expectations are for 1m home sales this year.
Transaction volumes are, naturally, linked to prices. Even if house prices fall 5% this year, they’re still around 10-15% ahead of where they were before the pandemic. To date, housing prices have been relatively robust considering the macroeconomic challenges at play. This could change.
The other consideration is borrowing costs. High interest rates often cause potential purchasers to defer their buying decisions, in turn pushing transaction volumes down.
Of course, higher interest rates can mean more sales… forced ones that may suppress prices . This happens when homeowners or landlord come to remortgage and face repayments far in excess of what they have been paying. But it’s not clear that we’re seeing this yet.
One in 10 homes for sales on Zoopla we previously rented. If landlords fail to pass repayment costs onto tenants, we may see more buy-to-let homes for sale.
Long story short, there could be more pain to come for housebuilders before things finally start to improve. Macroeconomic conditions are not conducive to higher transaction volume, and cost inflation remains positive.
Valuation
Of course, much of this pain is priced into the Persimmon share price. The stock is trading near its 10-year low. In other words, the market thinks this is the most challenging period Persimmon has had to navigate in the past decade.
Using earnings data from 2022, Persimmon trades at 4.2 times earnings. That’s obviously phenomenally cheap. However, on a forward basis the price-to-earnings ratio is around 12.2 times. That’s above an average P/E of 9.6 times for the fiscal years 2018-2022.
Of course, investors aren’t just buying for the next 12 months. Over a longer period, based on an acute lack of housing in the UK, we’ll likely see demand increase and earnings, hopefully, improve. That was certainly the opinion shared by Persimmon CEO Darren Finch in the H1 earnings call.
But in reality, without a clear improvement in macroeconomic conditions, Persimmon could fall further in the near term. A stock that’s down 65% over two years could still fall another 50% or more.
Personally, I believe the industry will stage a full recovery in the fullness of time. However, I prefer companies like Vistry. That’s because Vistry has an affordable homes unit — commissioned by local councils — that provides a degree of protection against private market woes.
It’s a defensive move, but if conditions in the private market don’t improve, Vistry’s rental and affordable homes will provide cushioning. It’s also worth mentioning that the government has missed its own affordable homes target, suggesting there could be a tailwind in this sector.
