As I write this, the Taylor Wimpey (LSE: TW) share price is up almost 12% on the day. This follows better than expected results this morning – a rare note of positivity during the second lockdown. But is this a sign of things to come?
Positivity in the housing market
The housebuilder said this morning, that it expects next year’s operating profit to be “materially above the top end”. It also expects overall results to be “towards the upper end of market expectations”. This may seem strange given the prevalence of coronavirus, but apparently, the housing market is not suffering as much as we may have thought.
According to Taylor Wimpey, the market has recovered well since the first lockdown this year. At that time, building sites were closed for the most part. In the English lockdown, they are not. Even with this news though, the company’s share price still stands about 30% lower than it started 2020.
According to Taylor Wimpey, demand for housing is still strong. CEO Pete Redfern said: “The quick recovery of the housing market is testament to the underlying strength of demand and supportive lending backdrop”.
If true, this is all good news for the firm. As with other players in the industry, its share price is usually driven by the underlying market. Personally though, I am slightly less certain of this positive outlook in the medium term.
Covid dominates all
Though this latest lockdown is not stopping much housebuilding, this is not the only worry regarding Covid. For me, the potential for a recession in the coming year casts a broad shadow over the Taylor Wimpey share price.
The truth is that while the first lockdown of this year may not have hurt the company as much as we expected, the second lockdown may drive the economy into recession. If this happens, people will lose their jobs and demand for housing will fall.
Don’t get me wrong, I am not trying to forecast doom and gloom. But I do think it is a possibility. If it does happen, today’s update from Taylor Wimpey will amount to very little. House prices have arguably been inflated for some time anyway, particularly in London. A recession may have an even greater than expected impact on the market.
The Taylor Wimpey share price long term
Looking past next year however, I think things may be better.
Taylor Wimpey tapped investors for £500m earlier this year and has already put that money to use buying up cheap land. Since the end of Q2, it has spent a gross £826m on land purchases – buying 70 sites and 14,500 plots of land.
Though next year may see the housing market take a hit, in the long run things will go back to normal. When they do, Taylor Wimpey may have just set itself up for even greater success. Buying land cheap is always a good investment.
Personally, today’s jump in Taylor Wimpey’s share price takes a little of the bargain out of it for me. But any dip in the near future may be a great opportunity to get in on the housing market for the long term, I feel.
Karl has no position in any of the shares mentioned. 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.