BUFFETT: HOUSING WILL COME BACK
I must have blacked out while reading this year’s unusually mundane Berkshire letter because Calculated Risk highlighted a good section on Buffett’s housing commentary:
“Housing will come back – you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households. Inevitably, we ended up with far too many units and the bubble popped with a violence that shook the entire economy. That created still another problem for housing: Early in a recession, household formations slow, and in 2009 the decrease was dramatic.
That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.
At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.) While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.”
Forever the bull on America….
That’s awfully anecdotal, and perhaps he misunderstands what is going on out there.
While living with in-laws does quickly loses its allure, when you are out of work (permanantly in some cases), you are stuck.
Second, many potential new homeowners would rather rent, not trusting the ownership model or not being able to qualify for a loan, or perhaps realizing that if you are going to move five or six times in your career it’s best not to own. Also, fewer people have children, and singles are perhaps less inclined to buy.
Lastly, an aging society is going to rent and not own.
Of course, my examples are anecdotal, too. But unless he has numbers, it seems like he’s cheerleading for the economy again.
There can be a lot of ambiguity in a word, but I’m not sure I would call it “cheerleading”. I think that Buffett knows two things:
1) There’s all kinds of unpredictable stuff that could happen, but:
2) The base case is that we will continue to innovate, thus the economy will continue to grow, thus observable excesses will have the opportunity to correct.
The only thing that leaves me scratching my head is that he even bothers throwing in the detail about in-laws. Such a tiny detail of an otherwise simply thesis.
Buffett is of course right in the long term. The housing market will come back. Eventually demand will outstrip existing supply. However, Buffett cannot tell us the timeframe of the recovery, nor can he tell us that the next housing boom will be like the last one. If the next boom is for mass produced affordable units instead of McMansions, that will be great for the builders, but not so much for the current underwater owners of McMansions.
I prefer to listen to Gary Shilling due to his anlaysis on housing. His most recent newsletter dissects housing in depth. Let’s just say he is pretty bearish and expects another downturn. He says that 2 million+ of inventory should push prices down around 20%. He keeps it simple like Buffett regarding supply and demand. He just takes the opposing viewpoint.
I wish people bearish on housing (and bullish, I suppose) would explain where they think rents are going to go.
Because where I live it’s one the more stable economies in the country AND has remarkably low price-to-rent ratios. Buying may not appear attractive, but neither does the 3% vacancy rate and rising rent prices.
When compared to historically low interest rates and high P/E-10 on stocks, a once-moderate price-to-rent ratio looks more attractive than ever.
I agree with BHB, by the way, the three piece article Shilling had in Loomberg I believe is probably his latest letter minus the charts. Please confirm as I no lo ger subscribe. I believe Shilling analysis is 100% in the money. I have been asking CalculatedRisk to please comment on the Shilling piece but he is a busy guy, and perhaps he likes Buffy better:-)
I focus on real estate and my local environment. My area didn’t fly high or sink so low. I recently purchased my first single family rental. I usually stick to duplexes with a long term focus. With this long term focus in mind I purchased this single family home. It needed a lot of work and I got it at a steep discount but I can rent it out at a higher rent and when/if the housing market turns around then I can easily sell. With a long term focus and the current dynamics in housing I see great returns that work out quite well either way….
Was it just me, or did Buffett “do MMT” again on CNBC last night?
I can not remember the exact quote, but it was along the line of..
“we import more than we export, and for that we give away pieces of paper – paper we can print. It’s great!”.
Buffett agrees with MMR. The trade deficit poses a risk to the USA. MMT says we can just print over it.
He owns Wells Fargo. Do you really think he is going to bash the housing market thereby slamming his own stock.
He makes his investments based on things others don’t see. He had interesting insights recently into who-shot-who in the foreclosure process. He’s defending his investment, however, there is some truth here that the media isn’t reporting and politicians are avoiding right now.
http://www.bloomberg.com/news/2012-02-27/buffett-says-banks-victimized-by-evicted-homeowners-who-emerged-as-winners.html
Yeah, the banksters are victims of borrowers who walked away. But who made those loans in the first place? Who failed to do proper due diligence, and failed to uphold rational credit standards? And who made all those loans, sold the loans, pocketed their obscene bonuses, and then got the hell out of Dodge?
A bubble is like a big drunken party where everyone gets beer goggles and does stupid things, and then wakes up with the ultimate horrible hangover that keeps on giving for years.
Of course. I had personal experience with this and tell-you-me, the loan broker had the pressure on. Still, It takes two to tango. I would never defend the banks, however, the point Buffett makes is an elephant in the room right now.
I think there is an equation that needs to be put in place to determine whether housing has reached a bottom-will reach a bottom soon-or still has a long way to go before even seeing a bottom.It is all about supply V Demand
Supply=baby boomers downsizing as they retire
Supply=foreclosures
Demand=people at an age able and willing to buy a home
There are NOT enough people coming up the ladder to obsorbe the supply from the baby boomers at the rate they will be retiring and doiwnsizing
Foreclosed homes=supply..but now you have to take (2) able and willing buyers out of the demand pool. (husband/wife) that have gone through foreclosure. They will NOT be ABLE to get back into the demand pool for at least 7 years.
I do not have the raw data for the population imabalance piece (baby boomers downsizing Vs able willing buyers)but I have seen it as well as the total numbers of foreclosed families being removed from the pool. This is just something to draw your own conclusions to, as far as whether or not we have seen a real estate bottom or not.
When looking at the way real estate has acted with the low interest rates-and what is coming down the pike, I am on the side that we have a ways to go before seeing a bottom in real estate. JMO
“Forever the bull on America….”
As comments go that’s really not one of your best. I have said beofre people need to be carful of ‘following’ Buffet.His mix of methodology,temperament and specific financial situation make it a winning mix only for people who share his characteristics. That said, as usual he is looking past where we are to where we will be and I have simply no doubt that what he is saying will come to pass. The problem is he often is seeings that will develop far sooner than most people. However, his analysis of supply/demand and how it is and how it will once again develop is far more likely to be right than wrong. The man himself knows better than to say something foolish ,that many in markets like to hear,that is he refrains from any silly attempt to say and it will happen at this time.He knows it is a process not an event.