New House Prices Holding Up, But...

How's it going in the housing market?

Well, not so bad. Maybe. After all, Persimmon (LSE: PSN), Britain's largest homebuilder, unveiled higher profits today.

Net income rose 4.3% to £413.5m while earnings per share advanced 2.8% to 136.8p, slightly below analysts' expectations. Average selling prices nudged up 1% to £189,558 but sales fell 4% to £3bn.

The operating margin increased to 21.8%, up 1% from 2006, boosted by tighter cost controls and synergy gains following the acquisition of Westbury last year.

And in a confident gesture, the full year payout was hiked by 10% to 51.2p for the 11th successive year of dividend growth.

But, as ever, investor's eyes were focused on the statement.

Despite a "very challenging" year and a current cautious outlook, Persimmon anticipates the property market getting stronger when "confidence returns and sentiment improves."

The start of 2008 has seen lower reservations than last year despite a pick-up in visitors, as possible purchasers are holding back from taking the plunge. And the benefits from recent rate cuts are being partly offset by tighter mortgage lending.

But cancellation rates have dropped to around 20% from over 30% in Autumn 2007 and weekly sales volumes are gradually improving.

Persimmon is clearly pinning its hopes on the second half of this year.

Is it right?

There are probably as many views on the UK housing market as there are home owners. Yesterday's report from property monitor Hometrack had ammunition for both bulls and bears.

Average property prices slid 0.2% in February, the fifth decline in a row, slicing the year-on-year advance to just 1.4%, the lowest level since April 2006.

Yet the number of new buyers registered jumped almost 8%, though Hometrack pointed out that such an improvement was significantly lower than in previous years.

What's more, January mortgage approvals plunged 31% as against last year, according to the British Bankers' Association.

There's no doubt that the oft-mentioned credit crunch has hit the housing market within the last few months. The big issue centres on the extent to which future confidence will be hurt.

And that will take a long time to assess. Relative to share prices, which jag around sharply and often dramatically, the housing market moves at a snail's pace.

Banks tend not to shout from the rooftops about their growing reluctance to lend. The increasingly inaccessibility of cheap mortgages will take many months to filter through the system.

In short, I think we could be set for an extended period of house prices in the doldrums. Not dramatic, just very dull. All of which makes me concerned that the Persimmon management will be issuing several more cautious comments in the years ahead.

What about Persimmon?

The shares have had a rotten year, down 45% compared with the FTSE 100 index. Now on a trailing price/earnings multiple (p/e) of just 5.7 and a yield of 6.6%, they probably won't suffer much more underperformance when compared to the rest of the market.