When Warren Buffet, the Oracle of Omaha speaks we all listen. I still believe he is one of the smartest business minds out there. And, he also has a compassionate heart for giving back. He has pledged 50% of wealth to the Bill & Melinda Gates Foundation and they both created the Giving Pledge asking their wealthy friends to pledge 50% of their wealth, too. Yes, Warren Buffet is an amazing business role model, and he is right most of the time with his financial recommendations. Just look at what he has done at Berkshire Hathaway, Inc.
Last week, Mr. Buffet was interviewed on CNBC regarding his forecast for 2012. During the interview he spent a good amount of time explaining why he believes it is time to buy single family homes. They are cheap, interest rates continue to hover around 4%, and it is an attractive long term investment. He also stated that many stocks were undervalued and he recommended purchasing them for the similar reasons. In 2012 he is not a fan of Treasury Bills, precious metals, are keeping assets in cash. To show you how Bullish he is on single family homes, he said he wished he could buy “a couple hundred thousand single-family homes” and easily manage them, and he would “load up on them” and “take mortgages out at very, very low rates.” ( Do you remember a past posting of mine that also said there has not been a better time to buy residential real estate than right now and the FEAR was one of the key factors stopping buyers from taking action?) He went on to explain the challenge of having that many homes is managing them. With stock purchases it is as easy as a click or two on your computer.
As you read the transcript from the CNBC interview, you will note that Mr. Buffet’s advice to young investors is to buy a single family home with a 30 year fixed mortgage. And, if they are a bit courageous, buy a couple of homes at distressed prices, fix them up, and rent them. Remember, the Mr. Buffett is noted for purchasing undervalued assets, and he is convinced that the single family housing market is one of those undervalued assets in 2012. One of the indicators of housing values is the Price-To-Rent Ratio. That number has fallen to 2003-04 levels – we are talking VALUES. And, there is still work for our government to complete that will accelerate the housing recovery. So, if you are considering whether to rent a home or buy a home in 2012 – BUY!
Mr. Buffet also said during the interview that “…housing will come back – you can be sure of that.” There are two factors impacting the health of the housing industry in 2012 – Supply and Demand. These two factors break down to housing starts and consumer demand impacted by the number of household formations.
So, the average annual housing starts from 2002 to 2007 was 1.34 million a year. The average annual household formation during the same period was 1.05 million. Do you see the problem? And, as we all now know, the housing bubble burst in 2008 and the U.S. and global economies have yet to fully recover. The good news from Mr. Buffet is, the situation has reversed in 2012. Here is what he said, “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.” The key factor that has now made 2012 the time to buy a single family home is that housing starts in 2011 were 609,000 and household formation was 1.14 million. This means a pent-up demand with the perfect storm of an undervalued asset that can be financed at around 4% for 30 years. WOW!
His final comments about why he believed so strongly about buying a single family home in 2012 were, “Demographics and our market system will restore the needed balance – probably before long… I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead,” said Buffett. Please CONTACT US today if you would like to take action on the most undervalued assets in 2012 – a single family home. Until next time…Jim Walberg.