When the greatest investor in history makes a sizable bet… it’s probably a good idea to pay attention, right? We certainly think so, and this time, it has very broad-reaching implications. But first, we believe it is important to know a couple of things about what has made Mr. Buffett the GOAT.
- He rarely does things that are fully intuitive to the everyday investor.
- His team has a better understanding of the legislative landscape than nearly anyone.
- His timeframe is until the asset is too expensive, and it does not matter when that is.
In the most recent example of this, Berkshire Hathaway just made a huge bet on homebuilders DR Horton, Lennar, and NVR to the tune of $814M. In fairness, to Berkshire, this may not be the biggest bet, but to anyone else, this is an enormous sum. And to many folks, a bet on housing right now seems crazy.
High interest rates, low turnover, concerns about a weakening economy make housing a risky bet. But to Mr. Buffet, this is likely one of the easier bets he’s ever made. Why? To us, the answer is multifaceted, but we see a few pieces worth noting:
- The industry has been cheap since the global financial crisis when homebuilders had terribly stretched balance sheets, and they were making huge speculative bets. The survivors of 2008-09 have rationalized their balance sheets and become much more conservative. But the stocks still trade well below market multiples.
- Since the GFC, builders have materially underbuilt relative to demand because existing home stock was very liquid.
- Homeowners are loath to move today because the same house will cost far more due to the change in rates. This means that if a young couple wants a new home, building new inventory is their best bet. And because of this, pricing will likely remain elevated for these properties.
As with many of the bets he’s made in the past, this one doesn’t rely on massive technological change. It also does not speculate on anything happening that would be considered incredibly unusual. Instead, this trade suggests that he expects a reversion to the mean, and the world has handed him low valuations because they are fearful of uncertainty. It was his 93rd birthday last week, so clearly it was time for the market to hand him such a gift.
Please look at the chart that we attached to this article. What it shows us is that we have a housing shortage relative to population growth that has been persistent since the GFC, and it’s one of the reasons we’re involved in multifamily real estate. Like Mr. Buffett, we’re price conscious. The home builders currently trade at a very inexpensive multiple. The aggregate of multifamily properties doesn’t right now, but we believe that it will again sooner than people appreciate. The same fundamental dynamics are in place for both assets (look at that chart!!!), but until we sort through the rate changes and structural issues at the banks, pricing won’t adjust. When they do, we’ll do just what we believe Mr. Buffett would do; we’ll buy at advantageous pricing, and wait for things to get better.