Is Warren Buffett’s Bet on Housing Finally Paying Off?

Article by Investment U

Warren Buffett stated last Friday on Bloomberg Television’s In the Loop With Betty Liu that Wells Fargo & Co.’s (NYSE: WFC) dominance of the domestic mortgage market will reap huge rewards as the housing market rebounds.

Now he and his company have definitely put their money where their mouth is. Look at what he’s done over the last year and a half:

• Back in January 2011, Buffett made additions to Berkshire’s “brick-and-mortar” portfolio by buying Jenkins Brick to combine with its existing brick maker Acme Brick.
• Last month, Berkshire attempted to expand its real-estate brokerage by making a $3.85-billion bid for a mortgage business and loan portfolio from bankrupt Residential Capital, LLC.
• Berkshire has gambled on commercial property through an entity owned jointly with Leucadia National Corp. (NYSE: LUK).
• Berkshire Hathaway Inc. (NYSE: BRK-A) owns more than 7% of Wells Fargo common stock. On top of that, recent regulatory filings tell us that they are buying more shares – increasing their stake in Wells Fargo even further.

The world is pretty much enamored with the Oracle of Omaha and his track record speaks for itself. But a year ago he stated the housing market had already hit bottom. Following investment legends is a strategy some might use, but what do the numbers say?

Data Hinting Toward a Bottom?

• Low Mortgage Rates – Federal Reserve Bank of Dallas President Richard Fisher stated to Bloomberg, “I do think the housing market has bottomed out… the improvement has been “assisted by these low mortgage rates that we’ve had.”

  Freddie Mac reported the average for a 30-year fixed-rate mortgage fell to 3.56% in the week ended July 12. That’s down from 3.62% just the prior week and 4.08% since the end of the first quarter. It’s the lowest in the company’s records dating back more than four decades.

• Home Prices Are Rising – According to the Case-Shiller 20-City Index for April 2012, the price to purchase a home rose 1.3% for the period between March and April 2012. Before this report was released, Case-Shiller showed seven straight months of month-over-month price losses. If you take into account the prior year before the report, home prices went down a negative 1.9%.
• Pending Home Sales – According to the National Association of Realtors, pending home sales rebounded in May. This matched the highest level for a period spanning the last two years – and the numbers are well above last year’s levels. The Pending Home Sales Index, a forward-looking indicator based on contract signings, went up nearly 6% to 101.1 in May. That’s an increase from the 95.5 in April and is 13.3% above May 2011 when it was 89.2.
• New Residential Sales – Sales of new single-family houses in May 2012 were at a seasonally adjusted annual rate of 369,000, according to estimates reported last month by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.6% above the revised April rate of 343,000. It’s 19.8% above the May 2011 estimate of 308,000.
• Cheaper to Buy Than Rent – Trulia, the online residential real estate site for home buyers, sellers, renters and real estate professionals, found that in an environment of skyrocketing rents and record low housing prices, homeownership is now more affordable than renting in 98 out of 100 major metropolitan markets – even expensive real estate markets such as New York, Los Angeles and Boston.

Everything Isn’t Rosy Just Yet, Though…

Even though a good number of analysts from Wall Street see the current landscape as the bottom and a sign of a housing recovery to come, some believe that this environment is an entirely new animal. It’s different than the housing market we knew even just a decade ago. We now have to deal with:

• Recent graduates dealing with overwhelming levels of student loan debt.
• Stagnate incomes since 1996 when Bill Clinton was President.
• Almost 50% of current homeowners are “stuck” in their houses.

These issues will weigh on the market for the foreseeable future.

But Beata Caranci, Deputy Chief Economist at TD Bank Group in Toronto, stated in a recent housing market report, “I don’t think it’s a head-fake, because when you look across all your price measures and construction measures on the starts side, you’re seeing broad-based indication of improvement… We have to be a little bit cautious… It’s the beginning of a recovery.”

A long those lines, a Reuter’s poll published on Friday showed most economists think the U.S. housing market has now bottomed and prices should rise nearly 2% in 2013 after a flat 2012.

Pro-Recovery Investing

If you believe in Warren Buffet and some of the other pro-recovery analysts out there, don’t expect a boom. This recovery will be slow and over the long haul. If you go in, this investment will be for the long term.

If you want to follow the Oracle, look at Wells Fargo. The bank created about one-third of U.S. mortgages in the first quarter of this year with aspirations to increase its market share to about 40%. The company said last Friday that the number of applications set a new quarterly high.

They accomplish these numbers as others in the industry have attempted to scale back mortgage operations.

You also may want to consider the SPDR S&P Homebuilders (NYSE: XHB). This ETF has broad exposure to housing related stocks. The index is up over 20% since opening the year at $17.44.

Good Investing,

Jason

Article by Investment U