Thursday, March 04, 2010
Is Warren Buffet Right about Residential Real Estate?
He's affectionately known as the Oracle of Omaha. So when billionaire investor Warren Buffett dropped a few choice words about the real estate market into his annual letter to shareholders in his company Berkshire Hathaway Inc., beleaguered homeowners across the nation did a little happy dance.
The reason was simple: Warren Buffett predicted that the protracted real estate slump would end some time in 2011. "Within a year or so, residential housing problems should largely behind us," he wrote on February 27 in his letter. "Prices will remain far below 'bubble' levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits."
While Buffett built his empire by betting on industries and companies he felt were undervalued, he has also made a few bad bets, as well. Indeed, reading between the lines of his investor's letter, hopeful housing watchers might proceed with caution.
Buffett, who was named the richest person in the world in 2008 by Forbes magazine with $62 billion, has a personal interest in seeing the residential real estate market recover. Berkshire Hathaway owns a real estate brokerage, a pre-fabricated home manufacturer, and other makers of products used to build homes. All of these investments were hammered during the housing crisis of the past two years. Clayton Homes, the pre-fab home company, saw its profits before taxes drop 9 percent last year.
In his letter, Buffett was frank about the dim prospects for new construction. "People thought it was good news a few years back when housing starts -- the supply side of the picture -- were running about 2 million annually," he wrote. "But household formations -- the demand side -- only amounted to about 1.2 million." With characteristic humor, Buffett said the only ways to correct that imbalance were for the U.S. to "blow up a lot of houses," "speed up householder formations by, say, encouraging teenagers to cohabitate," or to pull back on home construction.
Buffett's point is that housing values are at historic lows, which will induce more home shoppers to become buyers. But the troubles of the hundreds of thousands of people who owe more on their mortgages than their homes are worth won't be solved by a slight uptick in sales.
Buffett has always prided himself on investing when other investors are running scared. Last year's purchase of Burlington Northern Santa Fe Railroad is a good example. But Buffett's purchases of reinsurance firm General Re and corporate jet company NetJets both resulted huge losses. But this is a strategy available mostly to people with deep pockets, who can afford to make a mistake once in a while.
The key to the housing market, as Buffett would likely agree, is timing. Buy low and sell high works in any market. Just as Buffett did: He still lives in the same 5-bedroom stucco house he bought in Omaha, left, in 1958 for $31,500. Of course, it's now worth an estimated $700,000. That's appreciation we can relate to.
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