Buffett Housing Bet Picks Up Speed

Posted on October 31, 2012 at 12:37 PM PDT by

Evidence is piling up that billionaire investor Warren Buffett sees a housing recovery and, by extension, a generalized U.S. recovery dead ahead. Investors are closely watching the Buffett housing bet for signs that they, too, should get in.

Buffett’s holding company, Berkshire Hathaway (BRK.B) has struck a deal to combine forces with Canadian real estate brokerage Brookfield Asset Management, Bloomberg reports:

Buffett, 82, said in July that the U.S. home market was beginning to improve. Berkshire’s billionaire chairman and CEO tracks economic activity, in part, by studying the results of the company’s more than 70 operating businesses including ones that build manufactured homes, make paint and sell insulation.

“It was just a question of getting households in balance with” the supply of homes, Buffett told Bloomberg Television’s Betty Liu in a July 13 interview. “That happens in different paces in different parts of the country, but you have seen a much better balance developing here in recent months. And that’s why you’re seeing some pickup in prices in places.”

Should you join the Buffett housing bet? Buffett is famously a bottom feeder, buying in big only when asset prices decline to low enough levels to guarantee a win. Still, the housing bottom has been called plenty of times before this, only to disappoint.

Buffett housing bet

Nevertheless, the widely watched S&P/Case-Shiller Home Price Indices tell a compelling recovery story, metro by metro. A few areas are down year over year, including Atlanta (-6.1%), Chicago (-1.6%), and New York (-2.3%).

Yet the remainder are up, some sharply, signaling the logic of the Buffett housing bet. Phoenix has put on an astounding 18.8% price increase. Detroit is up 7.6%. Minneapolis is 7.4% higher, and Miami has gained 6.7%.

The composite numbers are positive, meaning the gains outweigh the losses across the indices. According to the latest S&P/Case-Shiller release:

Measured from their June/July 2006 peaks, the decline for both Composites is approximately 30% through August 2012 and approximately 35% from the June/July 2006 peak values. The August 2012 levels for both Composites are about 8.5% above their recent early 2012 lows.

Admittedly, Warren Buffett is very different from you and me. He tends to buy businesses directly for their cash flow, and he has enough financial muscle to strike extremely favorable deals. It would be hard to replicate the Buffett housing bet exactly.

Still, you can get into the Buffett housing bet by owning ETFs such as the SPDR DJ Wilshire REIT (RWR). Not a direct play on single-family housing, a REIT like RWR is instead hitched to a broad spectrum of real estate assets, including apartment buildings, malls, medical offices, even personal storage businesses.

In that sense, buying a real estate REIT offers you exposure to a generalized economic rebound, a trend Buffett clearly sees baked in as a result of the residential housing rebound.

Buffett housing bet made simple

A small investor seeking to ride the coattails of the Buffett housing bet might more directly attack this sector by qualifying for loans as an investor and buying up undervalued homes.

That approach, however lucrative, implies a significant amount of cash on hand and the ability to wait out dry spells in given neighborhoods and cities. Buying a REIT instead is quick and easy, and real estate should be an important slice of any well-designed portfolio.

What’s more, buying a REIT ETF allows you to enjoy instant diversification across a variety of types of real estate as a single share. No investment is risk free, but diversification in any asset class is as close to a free lunch as you will find in the investing game.