When Warren Buffett talks, people listen. In particular, the Oracle of Omaha gets investors’ attention when he issues his annual Berkshire Hathaway shareowner letter, a frank and enlightening assessment of the economy and investment outlook. What jumped out in this year’s letter released last week: Buffett is bullish on housing again, and he’s putting his money where his mouth is.
In his letter, Buffett notes that, “a housing recovery will probably begin in a year or so. In any event, it is certain to occur at some point.” He said that “home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates,” adding, as an aside, that “the third best investment I ever made was the purchase of my home.” The first two, he says, were wedding rings.
Consequently, Buffett told shareowners, he has made several strategic investments in the housing sector in recent months. Among these ¬are five corporate acquisitions in the building components field, a $50 million acquisition of a brick manufacturer, a new $55 million roofing plant for Johns Manville, and $200 million capital expansion of his Shaw Industries carpet company.
“Buffett doesn’t spend money unless he thinks he’s going to make money,” Jeff Matthews, hedge fund manager and author of Pilgrimage to Warren Buffett’s Omaha, said in a recent interview. Matthews said Buffett’s housing bullishness is “interesting because that didn’t happen last year and didn’t happen the year before that.”
The legendary chairman of Berkshire Hathaway isn’t the only one suggesting a turnaround in housing may be at hand. The Wall Street Journal ran an article recently headlined, “Why 2011 May be the End of the Housing Crash.” The Journal gives a number of reasons as to why we may have seen the bottom, including the fact that housing is the most affordable it has been in decades.
Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years, Moody’s Analytics says. Prices usually average close to two years’ pay, although that varies nationally. At the peak, midway through the last decade, a home in Los Angeles, the Journal said, cost the equivalent of 4.5 years’ pay. The average price has since fallen to just over two years’ income now. That’s well below its pre-bubble average of 2.6 years.
“Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own,” says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla. Such analyses are “definitely bullish,” the Journal said. “Housing prices will probably bottom in 2011,” agreed Scott Simon, a managing director at money-management firm Pimco in Newport Beach. His views are important because Simon foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.
The Journal also points out that investors are stepping up to buy real estate, which is usually another sign that the market has bottomed out or is near a bottom. In some instances, they’re paying entirely in cash. “That’s a far cry from the heady bubble days when borrowed money seemed the key to riches,” the paper reported. “It’s a sign that these investors are betting on a rebound.”
What to make of all this? It gives me reason for optimism that the real estate market in general – and the Colorado market in particular – may see much brighter days in 2011. As the economy continues to mend, it’s reasonable to expect some of the greatest economic gains will be seen locally thanks to our diverse economic makeup. That bodes well for our local housing market.
Leave a Comment
No comments yet.
Comments RSS TrackBack Identifier URI
