Why Warren Buffett Thinks Home Sales Are on the Rise

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The National Association of Realtors reports that U.S. pending home sales rose by 8.2% in February — a big increase over recent months.

Why the upswing? It could have something to do with the end of lower interest rates, the end of the homebuyer’s credit and the end of low inflation.

Or, it could have something to do with Warren Buffett. The Sage of Omaha predicted the housing rebound back in February. In a letter to Berkshire Hathaway (Stock Quote: BRK.A) shareholders on Feb. 27, Buffet said that by mid-2010, we’d be looking at the housing woes in the rearview mirror. “Within a year or so, residential housing problems should largely be behind us,” wrote Buffet. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.”

Buffett has put his money where his mouth is. In 2009, Berkshire Hathaway made $187 million in its stake in a housing construction company it owns. Buffett says that the market should be even stronger for housing in 2010, giving hope to both economists and actual homeowners that good news finally might be on the way.

His reasoning? Primarily, Buffett believes that the U.S. housing market was overbuilt during the past decade and is just now finding its balance. In his letter to shareholders, Buffet points out that the demand for new homes is roughly at 1.2 million homes annually. But the U.S. housing market has averaged about 2 million new homes per year, leaving a glut of homes on the market facing weak demand in a lousy economy. Now that the glut is heading downward again, the housing market, Buffett believes, is regaining its balance.

That said, not all areas will see the immediate rebound that Buffett estimates. Hard-hit areas like Florida, Nevada and Arizona, where new homes were built at a rapid pace during the mid-2000s, will see a significantly lower recovery rate, as demand slowly but surely catches up to the surplus of houses on the market.

Some other key points on the housing market from the Sage of Omaha:

  • Home sales should be reserved for actual homeowners. Flippers — investors who buy homes and try to flip them for a profit — are poison to a housing recovery, as they can’t make payments on multiple mortgages when demand is low.
  • Homebuilders shouldn’t build homes without pre-orders already on the table. A big part of the recent U.S. housing crisis was construction companies building homes without having a buyer waiting to move in. When homebuilders are more cautious, the housing market should benefit.
  • Buffett writes that record foreclosures flooded a U.S. real estate market already glutted with unsold property, causing housing starts to fall — and that’s a good thing for the overall health of the housing market.

Nobody can accuse Buffett of wearing rose-colored glasses — not from a guy who owns a company where one share of stock costs $119,800 (up from $15 per share when Buffett took the reins in 1965).

With that track record in mind, maybe the housing market really is on the road to recovery.

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