Warren Buffett: Pent-Up Demand, Low Interest Rates Will Spur Housing
Warren Buffett is bullish on U.S. housing, but only because he’s bearish on the willingness of young Americans to live in their parents’ basements.
Hormones — other people’s hormones — are prompting the Oracle of Omaha to revise his predictions about the future of U.S. housing, since it’s his contention that the creation of new households will spur demand for new 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,” Buffett wrote last week in his annual letter to Berkshire Hathaway shareholders.
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.
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 …
While this healing takes place, however, … housing-related companies sputter … 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 …
Fortunately, demographics and our market system will restore the needed balance – probably before long. When that day comes, we will again build one million or more residential units annually.
I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.
The beauty of Buffett is that, in addition to amassing an astounding collection of stakes in a wide-ranging array of companies, he speaks plain English in a world gone mad with money confusion. He’s not always right: Buffett blamed himself for a potential $2B loss in a natural gas play he made.
However, when it comes to analysis about broad trends in the U.S. economy, Buffett tends to make serious sense — with a little lighthearted advice thrown in. That was true when Buffett amplified his sense that single-family homes are a solid investment.
..if I had a way of buying a couple hundred thousand single-family homes and had a way of managing — the management is enormous — is really the problem because they’re one by one. They’re not like apartment houses. But I would load up on them and I would take mortgages out at very, very low rates.
But if anybody is thinking about buying a home — five years ago they couldn’t buy them fast enough because they thought they were going to go up, and now they don’t buy them because they think they’re going to go down. And interest are far lower. It’s a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out your interest rate’s too high, next week you refinance lower. And if it turns out it’s too low, the other guy’s stuck with it for 30 years. So it’s a very attractive asset class now.
However, there is further analysis to be mined when it comes to Buffett’s take on housing. As the Motley Fool noted in a piece by Morgan Housel: Whatever Buffett says about housing has to be measured against the reality that Buffett has lived in the same house in Omaha, NE since 1957.
For a look at how median income averages and future rise in interest rates should impact the decision to buy a house, the Motley Fool take on Buffett’s proclamation is worth reading.