Is it wise to flee Barratt Developments plc, Bellway plc, Bovis Homes Group plc and Persimmon plc?
The homebuilders sector is one of the worst performing in London today as investors flee the industry fearing the worst for the UK housing market following the outcome of the UK referendum.
Indeed, at time of writing shares in Barratt Developments(LSE: BDEV) are trading down by 20%, shares in Bellway(LSE: BWY) have been marked down by 18%, Bovis Homes(LSE: BVS) is off by 18%, and Persimmon(LSE: PSN) has lost 23%.
Broadly, speaking the Brexit vote is bad news for the UK housing market. Demand for housing in many of the UK's major cities has been driven by strong demand from overseas in recent years. This high demand has pushed up house prices across the UK.
Unfortunately, it's likely the vote to leave the EU will cause overseas investors to reconsider their decision to invest in the UK housing market, which will put pressure on prices.
So, it's possible the good times are over for the homebuilders as house prices are now likely to return to more normal levels. Still, demand for housing won't disappear overnight. Lower prices will make housing more affordable for the younger generation. A larger number of younger buyers will fill the gap left by overseas investors.
Good times coming to an end
It looks as if the profit surge enjoyed by homebuilders over the past five years is now set to come to an end as home prices fall. Margins on new homes are likely to fall for the rest of the year, meaning that the City's profit forecasts for companies like Barratt are now out of date and likely to be revised significantly lower.
Nonetheless, Barratt, Bellway, Bovis and Persimmon all have cash-rich balance sheets to protect them from any property market gyrations. With this being the case, there's little to no risk that these companies will be forced into liquidation during the next few months following today's result.
The biggest problem facing the homebuilders and investors is now uncertainty. When it's clear how the UK economy will suffer or benefit from Brexit only then will investors be able to arrive at a clear conclusion of what to do with the homebuilders. And of course, the action you decide to take will depend entirely on your own financial situation.
Long-term investors shouldn't be overly concerned about today's declines. The services of Barratt, Bellway, Bovis and Persimmon will still be in demand no matter what happens. The UK is facing a housing shortfall, and builders will still be required. But the days of excess profit now look to be over. It remains to be seen what effect this will have on the profit margins and cash return plans of the four homebuilders.
Assuming house prices fall, profits across the sector are likely to slide from historic highs going forward. With this being the case, it's almost impossible to believe current City forecasts for growth or income for Barratt, Bellway, Bovis, and Persimmon.
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Rupert Hargreaves 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.