UK house prices are rising! According to Nationwide, prices increased by 0.7% in January – the largest increase in a year and a departure from the general trend of 2023. The news could lift housing stocks like Taylor Wimpey (LSE: TW.) whose shares have already been pushing up recently.
Is this an opportunity to pick up cheap shares in the FTSE 100 housebuilder? Let’s explore.
Turning point
The question here is whether we’re at a turning point or not. Homebuilders have been in a rut lately – not unusual for such a cyclical sector – as mortgage rates have soared, building costs have ballooned from inflation, and homebuyers are struggling to get the cash together in a cost-of-living crisis.
A lack of demand for homes has hit the sector and many stocks are trading at big discounts from previous highs. Since February 2020, Persimmon stock has fallen 70%, Barratt Developments stock has fallen 61%, and Taylor Wimpey stock has fallen 62%.
However, we might be past the worst of it. January’s house price jump followed encouraging signs that interest rates will fall this year and mortgage costs are starting to trend downwards. According to Rightmove, the average five-year fixed deal has dropped from 5.92% at this time last year to just 5.35% today.
Inflation has been falling too. The Bank of England expects it to drop below the 2% target before 2025. This should ease the pressure on building costs looking ahead.
The good
While Taylor Wimpey’s completions and income dropped in their latest results, a few ‘ear to the ground’ metrics like website traffic and walk-in appointments were significantly up. This might be an early sign that 2024 will see a reversal in fortunes for the industry.
One advantage to buying Taylor Wimpey stock now is its dividend policy, which stands apart from other housing stocks.
While most housebuilders pay generous dividends, they are often inconsistent and follow the fortunes of the market. Taylor Wimpey offers more stability to passive income seekers with a policy to return 7.5% of net assets each year. Forecast yields of 6.37% in 2024 and 6.63% in 2025 lead the sector.
There’s plenty of safety here too. The balance sheet looks strong and £678m net cash is impressive given recent conditions. The 147p share price compares very favourably to a net asset value per share of 126p.
My move
The biggest risk for me is that we’re not out of the woods yet. Inflation might be falling but the cost-of-living situation remains and may get worse if we indeed entered a recession in the latter part of last year.
In all though, Taylor Wimpey looks like one of the better housebuilder stocks and I will consider opening a position in the near future.
