Why Buffett Is Betting on the U.S. Housing Market

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Carlisle discussed Why Buffett Is Betting on the U.S. Housing Market. Here’s an excerpt from the episode:

[Tobias] We’ve seen some moves out of Berkshire Hathaway. It’s not Warren Buffett anymore, but we don’t know how long these were in the pipeline. It’s possible that he sort of had his fingers on some of these, but Berkshire Hathaway and Lennar.

[Tim] Yeah. That’s interesting, right? It’s kind of Buffett’s Buy American.

If you’re a long-term believer in the US economy, you’re ultimately probably somewhat of a long-term believer in housing, in the housing market, and that’ll grow along with GDP. Of course, there’s times when housing prices get out of whack. Now, they might be out of whack if you compare them to rental prices, especially with where interest rates are currently.

If interest rates were to drop, it’s very likely that housing would see some tailwinds from that, of course. A stock like Lennar is trading at actually a discount to book value for arguably one of the top two or three most quality operators in the home building world. Lennar’s got a really interesting track record of smart strategic splits of their businesses.

They’ve separated an asset management business in the past. They’ve gotten into different spaces. Then once it kind of runs its course, they’ll sell it or spin it off.

I thought Lennar is an interesting choice and a smart choice. Also, they bought Taylor Morrison, which is pretty much a classic Buffett purchase. I think that they were kind of looking to sell and wanted a good long-term buyer.

They see value in the space. I don’t think they’re doing it for the next three months, even the next three years necessarily, but maybe the next 10, 30 years. Yeah, I think there is value in that space though.

The rates are a big reason for that.

[Tobias] Yeah, I’ve been watching home builders closely too. I think one of the interesting analyses has come out of Nick Gurley. He’s like a macro housing guy.

He talks about the rates aren’t that high on a historical basis. We’re sort of around about the long run average for rates, although it feels quite high relative to what we’ve seen over the last five or 10 years or so. He says that the fact that people were able to lock in low rates around 2020 has meant that this market has been a little bit bifurcated, where it’s been about half of mortgages are locked in at that sub 3%, 3% rate and about half are around 6%.

They’ve sort of converged together to where now there are more 6% mortgages in the market, but only just recently as one of the most recent prints. His analysis is that it’s probably house prices that have been a little bit sticky. Previously, that had benefited the home builders a little bit because they were able to sell into a market with perhaps artificially higher house prices.

It was an unusual scenario where new homes were actually selling at a small discount to existing homes, which is rare historically. Typically, new homes sell at a little premium. That little log jam in that market has created some problems for the home builders more recently.

I think that’s why we’ve seen the multiples. When you see a little bit of conflict, a little bit of tension in those markets, that’s often a good thing for investors because it means lower multiples and reduced earnings. The future probably looks quite a bit brighter, although we may have to go through a little period of instability to get there.

Lennar, do you like any other home builders? Yeah.