Buffett says housing woes to ease next year, barring explosions

NEW YORK: Billionaire Warren Buffett said the US residential real estate slump will end by about 2011, predicting that’s how long it will take demand for homes to catch up with the supply.

“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote last Saturday in his annual letter to the shareholders of his Berkshire Hathaway Inc. “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.”

The worst housing decline since the Great Depression has left one in five US mortgage holders owing more than their houses are worth. Record foreclosures last year flooded a real estate market already glutted with unsold property, causing new construction to fall to the lowest in at least 50 years. The fall in homebuilding is the only fix unless the US decides to “blow up a lot of houses”, Buffett joked.

“People thought it was good news a few years back when housing starts -- the supply side of the picture -- were running about two million annually,” said Buffett, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire. “But household formations -- the demand side -- only amounted to about 1.2 million.”

Berkshire, which owns a real-estate brokerage, a business that constructs pre-fabricated houses and units that make products used in homebuilding, has suffered amid the slump. Profit at Clayton Homes, the pre-fab housing business, fell about 9% to US$187 million (RM633.93 million) before taxes, while earnings at carpet manufacturer Shaw Industries fell 30%.

“High-value houses and those in certain localities where overbuilding was particularly egregious” will take longer to recover, he wrote.

“He’s very deeply invested in this,” said Tom Russo, partner at Gardner Russo & Gardner, which holds Berkshire stock. “Across his industrial companies, he’s massively poised to gain” from a housing recovery, Russo said.

Buffett joked that curbing home construction was the best of three ways to reduce supply. The other two, he said, would be to explode homes in a “tactic similar to the destruction of autos that occurred with the ‘cash-for-clunkers’ programme” or “speed up householder formations by, say, encouraging teenagers to cohabitate, a programme not likely to suffer from a lack of volunteers.”

Buffett’s annual communications with shareholders have won him a following of professional money managers and the moniker “the Oracle of Omaha”. He’s written passages in past years that compare investing to baseball, derivatives to venereal disease, and Wall Street bankers to Pied Pipers. The letters have been compiled into a book for those who want to study his pronouncements.

Buffett, 79, built Berkshire into a US$198 billion company through investments in firms he believes have superior management and lasting competitive advantages. His deals transformed Berkshire from a failing textile mill into an enterprise that makes candy, produces power and sells flight time on private jets. The shares traded at about US$15 when he took control in 1965; the Class A stock last closed at US$119,800.

Still, he and Vice-Chairman Charlie Munger passed up opportunities when they weren’t able to evaluate the future of a business, even in a compelling industry, he said. That strategy has allowed the stock to perform better than the benchmark Standard & Poor’s 500 in every year when both Berkshire and the index have fallen.

“In other words, our defence has been better than our offence,” Buffett wrote. Last year, he said, Berkshire should have made more purchases of corporate and municipal bonds because they were “ridiculously cheap” when compared with US Treasuries.

“When it’s raining gold, reach for a bucket, not a thimble,” he said. – Bloomberg LP
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