Stocks to buy in the housebuilding sector

I am always looking for stocks to buy to add to my portfolio. But I haven’t been seen in the housing sector for a while.

I really have substantial exposure to the sector. However, it has not been good for me. The huge dividend payout hasn’t made up for the falling share price.

In general, the environment of inflation and higher interest rates has not been good for homebuilders. Inflation pushes up building costs while higher interest rates reduce housing demand.

However, there is some evidence to suggest that the sector is fairing more than expected. Liberum recently pointed to “amazed” strong demand and falling mortgage rates.

The investment bank added that this is a positive sign for the sector moving into traditionally warmer months.

However, there are also some negative data including falling house prices, and the danger of profit from persimmon – sector leader.

So, with the above in mind, I’m going to take a look at two of the best house builders in the UK.

Vistry Group

Vistry Group (LSE:VTY) is one of the cheapest housebuilders on a forecast price-to-earnings basis – around 5.5. Pre-tax profits are expected to rise by 21% in 2022, to around £418 million, up from £346 million last year.

However, the big challenge is 2023. Affordable housing is an important part of Vistry, and demand may be more resilient here. So, investors will look to the partnership side of the business to help the company generate above average returns.

“Vistry is another stock where the premium needs to be re-established in the sector. The partnership should prove resilience and premium growth in 2023, helping Vistry outperform its peers“, Liberum recently noted.

The dividend yield on the stock is currently 7.8%.

Bellway

Bellway (LSE:BWY) recently reported “a strong first round performance“, with a record completion of 5,695 homes and a 1.6% increase in the average sale price to £316,900.

However, once again, it is 2023 that worries investors. Bellway said overall reservation rates have decreased by 31.7% to 138 per week. And private bookings fell 43.8% to 91 per week.

The company said that weaker private demand, due to higher mortgage rates and the end of the help-to-buy scheme was partially offset by the company’s program to accelerate the construction of social housing.

Liberum, in a recent update on the housing sector, said it likes Bellway’s strong balance sheet, relative value, strong operational management team, and balanced portfolio.

A cautious optimism

Of course, be careful in this sector. A further rise in interest rates could impact overall housing demand and prices. But both companies offer some degree of insulation from the private market thanks to their affordable housing operations.

The government’s affordable housing plan could break the production target by 32,000 homes. In theory, this could be a safer business for these two home builders.

I already have Vistry but I want to buy more, while also adding Bellway to my portfolio.