Persimmon Preview: Can it sustain forward sales?

With the housing market facing headwinds caused by higher rates, the UK's second-largest homebuilder will give a trading update.
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What's the heading?

The BOE started raising rates in April, but mortgage rates had already started rising. Throughout the first half of Persimmon's fiscal year, the cost for homebuyers to enter the market steadily increased. Nevertheless, despite a drop in completions, the company was still upbeat about its prospects during its half-year report. Revenue slipped, but the value of forward completions increased.

The UK might be repeating a pattern in the US, where interest rates are also rising: higher-end homes have shown more resilience than lower-cost homes, likely because the double effect of inflation and credit cost hurts lower-income households more. This is reflected in the increase in the average home sales price; it's not that the price of housing is rising, but that lower-cost houses are simply not selling.

The next steps

This makes investors curious if another pattern will also be repeated in the UK: Legal completion numbers will fall, reducing available homes. This means that the company builds out the home, so it's nearly complete, but it doesn't make the final steps to deliver to the customer
to avoid retrofitting costs if the customer cancels at the last minute. Persimmon doesn't regularly report cancellation rates, which makes it harder to delve into this aspect of the business.

Tomorrow's report is a trading update, which typically won't include sales numbers. So traders are likely more interested in the tone from management about the housing environment. Most recently, the company affirmed its outlook to sell 14.5-15.0K homes this year and increase completions by 10%. The forward sales rate was 90%, so it will focus on whether it can sustain those numbers in the coming fiscal year.

Persimmon in rare combo

Persimmon's price action appears to have completed an inverse head-and-shoulders pattern, followed by a rising wedge. The two patterns intersect by the left shoulder, where the wedge's lower low begins. If 1350 breaks, the stock could reach the top trendline near the 1400-1450 zone, but only its break would expose 1700. Inversely, losing the shoulder; low of 1180 could let prices slide to the "head" low of 1100 and eventually head towards the 1000 handle.

In the interim, 1400 and 1530 are significant resistance levels, whereas 1275 and 1180 are short-term supports.

Key takeaways

The UK's second-largest homebuilder, Persimmon, will give a trading update tomorrow. The company is facing headwinds from higher mortgage rates. Despite a drop in completions, the firm is still optimistic about its prospects. It appears that the UK is repeating a pattern seen in the US, where higher interest rates are hurting lower-cost homes more than higher-end homes.