Despite the doom and gloom of last year, I reckon FTSE 100 housebuilders Taylor Wimpey (LSE: TW.) and Barratt Developments (LSE: BDEV) could be about to embark on a much better year ahead.
I’ve decided the next time I have some spare cash, I’ll be buying some shares for my holdings. Here’s why.
Economic volatility cooling?
Rising interest rates, soaring mortgage rates, as well as heightened inflation created a cocktail of misery for the housing market last year. Completions, margins, and sales were all down for the majority of house builders.
However, inflation has shrunk, according to recent figures. Furthermore, the Bank of England (BoE) decided not to increase the base rate most recently. This has led many economists to believe interest rate cuts could be on the horizon. Mortgage companies seem to agree as they’ve begun to cut rates on mortgage products, which is good news for home buyers.
It’s worth mentioning we aren’t out of the mire yet. Inflation could creep up and the BoE could increase rates yet again. In addition to this, the current cost-of-living crisis isn’t helping people save for a deposit either. Food inflation and energy costs are still sky-high compared to pre-pandemic levels.
There are lots of positives ahead, if you ask me. House builders seemed to have been prepared for volatility with cash in the bank and ready to navigate stormy waters. Crucially, there is still a chronic housing shortage in the UK. House builders can help plug this gap and capitalise at the same time.
Finally, it is election year here in the UK! This means the current and prospective governments will no doubt view the housing shortage as a potential opportunity to bolster popularity points. There will likely be promises to boost house building.
My investment case
Taylor Wimpey and Barratt Developments are two of the biggest firms in their industry. A wide footprint and profile should help both to build more homes and boost performance. This is good news as it could help shares head upwards and boost investor returns.
At present, both shares look excellent value for money on a price-to-earnings ratio of nine for Taylor and 10 for Barratt. Interestingly, both stocks have seen their share prices climb steadily since November. Economic sentiment had begun to increase at the back end of 2023.
Next, housebuilders traditionally pay good dividends. At present, dividend yields of 6.6% for Taylor and 6.2% for Barratt are extremely attractive. Both are higher than the FTSE 100 average of 3.9%. However, it’s worth remembering dividends are never guaranteed.
I reckon continued economic volatility and soaring costs are two risks that could derail both stocks from climbing in 2024. As costs soar, margins are squeezed, which can hurt investor sentiment, rewards, and growth plans. Plus, continued higher food and energy prices could dent house buying numbers.
Overall I reckon as 2024 goes on, both stocks will fare better than last year. I also believe this will be the case for the housing market in general. Now is a good time for me to buy some shares to capitalise. If I wait too much longer, I may miss the boat.
