Is the housing market about to crash?

Shares in retirement home builder McCarthy & Stone (LSE: MCS) fell by more than 10% this morning. The firm admitted that cancellations had risen since the end of June and warned investors of a potential slowdown in the secondary home market.

McCarthy & Stone’s financial year ended on 31 August. Although legal completions for the year rose by 20% to 2,299 units, McCarthy said that “higher levels of incentives” had been required to meet full-year sales targets

Virtually all of McCarthy’s customers have to sell a property before they can buy a retirement home. A slowdown at the top end could soon trickle down to include the whole housing market.

Lower mortgage approval rates also suggest the market could be slowing. According to data released by the Bank of England this week, mortgage approvals fell to 60,900 in July. That’s down from 64,800 in June, and is the lowest level seen for 18 months.

Jumping to conclusions?

In fairness, the summer period is always a slow one for the housing market. Until the autumn buying season gets under way, we won’t be sure whether the UK’s Brexit vote has damaged the housing market.

It’s also possible that a slowdown in the top half of the market won’t immediately affect first-time buyer demand for starter homes. These are often new properties, built to take advantage of the Help To Buy scheme. The government is targeting 200,000 new homes for first-time buyers by 2020.

Buy, sell or hold?

After this morning’s drop, McCarthy shares trade on a P/E of 10.9 and offer a forecast yield of 2.4%. Even if you’re bullish about the property market, I don’t see much attraction here. Several of the mainstream housebuilders have lower valuations, higher yields and bigger cash piles.

Better buys elsewhere?

Shares in both Persimmon (LSE: PSN) and Bovis Homes Group (LSE: BVS) fell by around 2% today after McCarthy’s statement was released.

However, these general housebuilders target a high proportion of first-time buyers and others who benefit from the government’s Help to Buy scheme. These public subsidies could make housebuilders’ sales more resilient.

Persimmon’s order book certainly looks much stronger than McCarthy’s. Persimmon reported forward sales of £1.75bn at the end of June. That’s equivalent to almost seven months’ sales at current rates. In comparison, McCarthy’s forward order book of £114m only represents 2.2 months’ sales.

Persimmon generated a 29% increase in pre-tax profit during the first half of this year and reported net cash of £462m at the end of June. This equates to 149p per share, meaning that the firm’s next dividend of 110p should be safely covered.

Bovis also reported strong cash generation during the first half, although the firm did warn of a slight slowdown in sales since the end of June.

My pick?

York-based Persimmon currently trades on 9.7 times 2016 forecast earnings, with a forward yield of 5.9%. Similarly, Bovis Homes looks affordable on 8.4 times forecast earnings, with a forward yield of 4.7%.

I’m not bullish enough about the housing market to invest in housebuilders’ shares at this time. But I do believe that firms like Persimmon could be a better option than McCarthy following today’s news.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.