Saturday, February 25, 2012

Buffett's Views on Housing

by Bill McBride on 2/25/2012 06:44:00 PM

In Feb 2010, Warren Buffett wrote:

[W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.
Of course I disagreed with his timing.

Then in Feb 2011, Buffett wrote:
A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.
As I noted last year, the key word was "begin" and sure enough - based on housing starts and new home sales - it appears a modest recovery has begun.

Today Buffett wrote:
Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong.
Really? And I was going to give him a little credit this time. Oh well.

More from Buffett:
Housing will come back – you can be sure of that. 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.

That devastating supply/demand equation is now reversed: Every day we are creating more households than 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.

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. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.) While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. 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.
Buffett makes several key points:
1) Housing completions have been at record lows.
2) There are currently more households being formed than new housing units completed, and this is decreasing the excess supply.
3) The excess supply will be "sopped up" at different rates across the country.
4) Housing is a key reason for the sluggish economy (not the only reason).

Earlier:
Summary for Week ending February 24th
Schedule for Week of February 26th