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Earnings season: down 35% are Barratt shares a no-brainer buy?

estate agent welcoming a couple to house viewing
Image source: Getty Images

In its latest earnings figures released today, Barratt Developments (LSE: BDEV) reported a significant slowdown in housing market activity. Unsurprisingly, its share price fell in early trading, losing 2% of its value. With Barratt shares down 35% in a year, is now the time for me to consider adding them to my portfolio?

Disappointing figures

In its half-year results to 31 December, Barratt reported extremely disappointing figures, with virtually every metric heading in the wrong direction.

Net private reservations for the period were down 40% compared to the same period last year. This fall simply reflects the ongoing political and economic uncertainty at the moment. The rate of decline accelerated in Q2 as surging interest rates hit mortgage affordability and homebuyer confidence.

There were some positives, however. Home completions rose 7% to stand at 8,067. This growth is attributable to its strong forward sales position as well as elevated construction activity in the period.

Total average selling price increased by 14.6% to £330,000. Increased completions across London helped to drive some of this increase. However, this figure needs to be put into the context of build cost inflation, which currently stands at 10%.

Housing market freeze

Barratt’s poor figures don’t come as much of a surprise to me. Evidence has been emerging for some time that the wheels might be starting to come off the once-bullet-proof housing market.

Since December 2021, the Bank of England (BoE) has raised rates nine times. They now sit at 3.5%, the highest they’ve been in 14 years. This is all designed on purpose. Higher rates mean people borrow and spend less.

Clearly, this stance is beginning to have its desired effect. In November 2022, BoE figures show the number of approved mortgages fell by 20.4% to 46,075. Year on year this figure was 33.2% below November 2021.

The latest RICS UK Residential Survey shows overall activity continues to weaken across the sales market. New buyer enquiries came in at -38% in November, marking the seventh successive negative monthly reading for this indicator. For the second consecutive month, all respondents across the UK cited a decline in agreed sales.

Would I buy Barratt shares?

I could think of one very good reason for me buying Barratt’s shares, namely that juicy 9% dividend yield. Although its net cash position has fallen 15% in a year, it still stands at a healthy £965m. The group has also instigated a £100m share buyback programme.

The Halifax estimates that house prices will fall by 8% in 2023. Although this figure looks substantial, it would simply mean a retracement to prices in April 2021. In other words, most of the gains driven by a post-pandemic boom would still be in place.

However, the UK is in a totally different environment now than a few years ago. Gone is help to buy, a stamp duty holiday and the era of cheap mortgages. Confidence among buyers is falling. Sellers, on the other hand, don’t want to reduce prices to reflect a new economic reality.

Who blinks first is anyone’s guess. But if interest rates continue to remain high, I can only see further pain in the housing market. So I’m sitting on the side-lines in the expectation of a more attractive entry point to buy the shares.

The post Earnings season: down 35% are Barratt shares a no-brainer buy? appeared first on The Motley Fool UK.

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Andrew Mackie 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.

Motley Fool UK 2023