With housing, Buffett chooses a great location

NVR

30/08/2023 18:05

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Ben Winck
       WASHINGTON, Aug 30 (Reuters Breakingviews) - Mortgages
are pricey, but Warren Buffett seems to think that’s a good
thing for homebuilders. The billionaire’s Berkshire Hathaway
 BRKa.N  conglomerate recently disclosed investments in
companies that erect single-family houses even as higher
interest rates crimped demand. The economics of the average
American household suggests buyers could soon hit the market,
and these constructors will be the only game in town. 
    Berkshire earlier this month said it bought stakes in D.R.
Horton  DHI.N , Lennar  LEN.N  and NVR  NVR.N , just as mortgage
rates hit the highest level in nearly 23 years. At first blush,
the picks look not only contrarian, but risky. Affordability
remains a high barrier. But D.R. Horton, for one, throws in
discounts that help mitigate borrowing costs, and sells its
average home at a closing price of $378,600. That’s 3% less than
last year, and 7% less than the average used-home price today.
With a 10% down payment and a 30-year mortgage at 7.3%, a buyer
would have to fork over an extra $176 a month if they didn’t
choose D.R. Horton. 
    Incomes are climbing, too. Average hourly earnings have
increased 4.4% since last July, according to the U.S. Bureau of
Labor Statistics, and raises look set to keep outpacing
inflation. The average home price-to-income is around 7.75,
suggesting an annual pre-tax salary of $49,000 is required to
buy a D.R. Horton house. Yet employers are under pressure to
give bigger raises amid labor shortages and contract
negotiations. If wages rise 6% this year, D.R. Horton’s average
home price falls another 3%, and income is taxed at 25%, buyers
would take home roughly $223 more per month, despite higher
mortgage rates.
    Potential homebuyers may get more confident. Meanwhile,
existing homeowners are as reticent as ever to sell. Just 14 of
every 1,000 U.S. homes changed hands in the first half of this
year – the smallest share in at least a decade – as owners balk
at new mortgages, according to real estate outfit Redfin. And
apartments don’t pose much of a threat, either. Median rents for
two-bedroom apartments in metropolitan areas like New York and
Los Angeles exceed the monthly payment for a suburban D.R.
Horton home. 
    Plus, builder incentives, including temporary interest rate
cuts, give them an advantage over individual home sellers who
can’t offer the same perks as easily. Construction companies,
then, are the only ones that can offer prospective movers a
deal. For Buffett and Berkshire, that’s a healthy foundation for
new investment.
    Follow @BenWinck on X

    CONTEXT NEWS
    Berkshire Hathaway disclosed new investments in homebuilders
D.R. Horton, NVR and Lennar on Aug. 14. The conglomerate, run by
billionaire investor Warren Buffett, purchased $726 million, $71
million and $17 million of DR Horton, NVR and Lennar shares,
respectively, throughout the second quarter, according to a
Securities and Exchange Commission filing.
    The average interest rate on a 30-year, fixed-rate U.S.
mortgage rose to 7.31% in the week that ended Aug. 18, the
Mortgage Bankers Association said on Aug. 23. That marks the
highest rate on the country’s most popular home loan since
December 2000, and follows a weeks-long uptick in yields on U.S.
government bonds.
    Sales of newly built U.S. homes rose 4.4% in July to a
seasonally adjusted annual rate of 714,000 units, the Census
Bureau said on Aug. 23. Economists surveyed by Reuters expected
new home sales to climb to an annualized pace of 705,000 units. 

 (Editing by Lauren Silva Laughlin and Sharon Lam)
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