August 13th, 2012
The Oracle of Omaha Bets on Housing
With his $44 billion net worth, Warren Buffett is considered the most successful investor of all time. He can move markets merely by mentioning a bullish interest in them. As a result, we were pleased to learn of his recent bet on the housing industry. Warren Buffett is a value investor, meaning he acquires assets he believes are currently undervalued relative to their fundamental long-term worth. He was asked recently how he has been able to make so much money in investments. He replied that, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
We must assume that his recent $3.85 billion bid to buy a mortgage operation and loan portfolio from bankrupt Residential Capital LLC was motivated by that philosophy. While news from the trenches may be improving, statistics on the overall housing market continue to oscillate between good and bad news. This is an ideal time for an investor like Buffett to step in: there is still enough downside risk to the story that other investors are fearful but it is also possible to see light at the end of the tunnel. In addition to this mortgage business, Buffett’s Berkshire Hathaway has acquired a brick manufacturer and has expanded its real estate brokerage holdings. Berkshire has also made significant bets on commercial real estate through a joint venture in which it is a partner.
A number of factors played into Warren Buffett’s decision to increase his bet on a housing recovery. Housing permit numbers are improving, the JCHS says that home inventories are at record lows and employers have added 1 million jobs in 2012. Also, mortgage rates haven’t been this low since the 1950s. Earlier this year, Buffett said if he could conveniently buy and hold several hundred thousand single family homes as an investment, he would do so without hesitation. He even opined that right now a young investor in their 30s should buy a single family home with a mortgage rather than stock.
Cynics may point out that Buffett’s 2003 purchase of Clayton Homes was premature and that his prediction that the housing market would be in full recovery by now turned out to be incorrect. However, having Warren Buffett bet a few billion dollars that things are looking up for your industry has to be cause for optimism.