With the stock market down, I’m on the lookout for shares to buy before the market recovers. And, personally, I think the house building sector is a great place to start.
So, let’s take a closer look at why I’m bullish on developers, and which stocks I’d buy today.
Why I’m bullish on house builders
Right now, many home building stocks are trading at a substantial discount compared to even last year. They’re also offering attractive dividend yields.
Share prices have fallen considerably due to a number of reasons. We have higher inflation pushing up building costs, there is a cost-of-living crisis, higher borrowing rates, and negative economic forecasts.
House builders have also been forced to sign up to a fire safety pledge by the government. The recladding of thousands of homes is costly, in the billions.
However, housing prices are currently at record highs, despite interest rates rising, and house builders are registering record profits.
The thing is, many house builders haven’t traded for cheaper than they are today. Well not in the last five years or so.
And I’m also bullish on long-term demand for property. Successive governments haven’t addressed the UK’s acute housing shortage, so I think demand will continue to outstrip supply for the foreseeable. Despite leaving the EU, the UK is a net receiver of migrants.
The fundamental data
So, let’s take a closer look at house building stocks and compare valuations, dividends, and the cost of the fire safety pledge.
Firstly, the price-to-earnings (P/E) ratio.
| Stock | P/E ratio |
| Barratt Developments | 7.6 |
| Crest Nicholson | 7.7 |
| Persimmon | 7.4 |
| Redrow | 7.8 |
| Taylor Wimpey | 6.8 |
| Vistry Group | 7.3 |
Secondly, the dividend yield. It’s worth noting here that a giant dividend yield isn’t necessary sustainable. It is unlikely that Persimmon will be able to keep its dividend payments at the current levels.
| Stock | Dividend Yield |
| Barratt Developments | 5.9% |
| Crest Nicholson | 5% |
| Persimmon | 12.6% |
| Redrow | 4.2% |
| Taylor Wimpey | 6.8% |
| Vistry Group | 6.5% |
Thirdly, the cost of the fire safety pledge.
| Stock | Cost of fire safety (cladding) pledge |
| Barratt Developments | £350m-£400m |
| Crest Nicholson | £127m-167m |
| Persimmon | £75m |
| Redrow | £200m |
| Taylor Wimpey | £245m |
| Vistry Group | £50m-£70m |
Top picks for my portfolio
My top pick for the sector is currently Persimmon. The housing giant has less exposure to the cladding crisis than its peers. It’s also considerably less exposed than its peers as a proportion of its total revenue.
Persimmon also recently announced that H1 profits were up, but delays meant that deliveries were down. However, is that such a bad thing to make more money on less deliveries? After all, these houses will be completed eventually.
Another favourite of mine is Vistry Group, which is growing impressively fast. The house builder recently said it expects pre-tax profit to be at the top end of market forecasts (£417m). That’s way above pre-pandemic levels and far above the £319m achieved last year. It’s also got a strong dividend yield and is among the cheapest by the P/E metric.
My final, and slightly speculative pick, is Crest Nicholson. After a period of restructuring, the house builder appears to be expanding pretty quickly. The share price is heavily discounted versus 2018, before it started experiencing challenges.
I’d buy all of these stocks for my portfolio today.