As global markets crashed amid coronavirus fears, you may have missed one piece of good economic news yesterday. House prices rose 2.3% in February, the fastest for 18 months, Nationwide‘s latest survey showed. Buyers gained confidence from Boris Johnson’s conclusive election victory in December, and took advantage of low interest rates and high employment levels.
This offers some comfort for housebuilders such as Persimmon (LSE: PSN) and Vistry Group (LSE: VTY), the construction company formerly known as Bovis Homes.
The sector has been hit by the recent panic. The Persimmon share price fell around 12% over the week, closely followed by the Vistry Group share price, down around 11%. Other sectors, notably travel and hotel, were hit much harder.
A sector I like
House price growth was ignored amid the rush to dump stock, as investors sold off the good along with the bad and the ugly. That’s why a market crash can be an attractive buying opportunity for long-term investors, who can afford to look beyond short-term setbacks.
The housing market is not immune to coronavirus worries. Estate agents fear wary buyers will remain at home, and have already reported a drop in enquiries. Also, if people are worried about the impact on their livelihoods, they will be reluctant to commit to major financial decisions, and they don’t get much bigger than buying a house.
In a more extreme case, the virus could hit supply lines, or force builders to close sites, but we are far from that at the moment.
Keep a close eye on markets
This is obviously an uncertain time for everyone, even those tempted to go shopping for bargain stocks. Most analysts believe markets have further to fall, so you may wish to hold your fire a little longer, but the opportunity is getting closer. So work on your watch list, and run the rule over the likes of these two.
Persimmon has been controversial for serving up huge executive bonuses while scrimping on build quality, and last Thursday’s final results were a disappointment. Total group revenue fell 2.4% to £3.65bn, profit before tax dropped £50m to £1.041bn, and margins fell too. It is now looking to rebuild its reputation after recent troubles, and the news that CEO David Jenkinson is stepping down after 15 months in post may help.
Now may be a good time to buy Persimmon, ahead of its hoped-for revival. It looks tempting, trading at 12.1 times forecast earnings and yielding a forecast 7.5%, but thinly covered just 1.1 times.
Of the two, I prefer Vistry Group.
On Thursday, it reported “another record year of profits” with profit before tax up 12% to £188.2m, beating market consensus. Vistry’s stock still fell 3.28% that day, as coronavirus fears trumped all. It is now trading at just 10.7 times forward earnings. The yield is lower than Persimmon’s at 5.2% but cover is healthier at 1.8.
As house prices rise but housebuilder share prices fall, the sector looks tempting. It may look even more tempting in the days ahead.