BUFFETT INVESTMENT SIGNALS US HOUSING RECOVERY?
By Ruma Dubey
Those in the market and some of them, who are not so active in the market, unanimously dote on every word and every action of one person – Warren Buffett. Whatever he does, his quotes on life, the way he leads his life, the stocks he buys and sells, his profits, his annual meeting at Berkshire, his email to his employees; everything is watched with a hawk eye. There is always this notion that one could learn from him, not just about life but about stocks. The stocks which he picks, naturally, become winners and people are always on the lookout, trying to find where he is investing.
In July, he had said that a recovery in the housing market was a critical part of a broader economic recovery and stated that the market was gathering some momentum. All that was a preamble to his sizeable (he never buys in small quantities) investment in ResCap, a bankrupt mortgage lender. And a couple of days ago, Berkshire Hathaway’s Clayton Homes, the largest producer and financier of manufactured homes in the United States, reported a 45% jump in its second-quarter pretax earnings on the back of increased unit sales.
Post this, there was economic data which stated that the U.S. real estate market is a turnaround. In May 2012, Standard & Poor’s/Case-Shiller Home Price Index showed a growth of 2.2%, this is two consecutive months of growth. The index measures the prices of all 20 cities in the monthly growth. Another financial information company, CoreLogic stated that home prices rose in June, up 1.3% from May and 2.5% on a YoY. Also June housing starts were at their highest point in nearly four years.
The performance of Clayton, Buffett’s bidding for Rescap and then the reports showing recovery in the housing sector indicates one thing – Buffett is betting big on the housing sector which is showing signs of recovery.
This is making big news – not just Buffett’s vision as always but the fact that the US housing sector is probably recovering. Like in India, where the realty sector is a reflection is the state of the economy, in USA too, it is recovery of housing which will mean a recovery of the US economy. A depression in housing means too many houses on the block to sell, equal or more number of insolvent U.S. consumers and this means low demand in all other facets. But a recovery in housing means a recovery in which people are actually going back to work. Data point out that building houses leads to higher job creations - according to 2008 estimates from the National Association of Home Builders, building one new single-family home yields 3.05 jobs, compared to the 1.16 jobs created for each rental unit. Infact IMF has stated that a recovery in the U.S. housing market is key to eventually boosting economic growth in the United States and bringing down the country's unemployment rate. Creating jobs would mean money in the hands of people and that in turn will mean increase in demand and thus economic growth. Housing recovery heralds’ recovery in construction, building materials and the entire financial machinery behind realty – banks, financial institutions.
This does not probably mean that housing will be back and booming. The recovery will be gradual and analysts there expect that housing activity is beginning to turn around and could be a growth driver, probably by next year. In this year, it is expected that housing will add only 0.3% to the GDP.
Buffett has caught the sector when it is down and because he has belief that it is poised for takeoff. After all, he said, “Don’t gamble, but watch for unusual circumstances. Excellent investment opportunities come about when superior businesses experience a one-time event that depresses the stock price in relation to its intrinsic value.”
What does this mean for India? Do we follow Buffett and start buying into realty stocks? There will be no direct impact but the indirect impact, in terms of improvement in sentiments and a feeling of optimism, will be immense. If one of the most developed economies of the world gets back on its feet, naturally, it will spread all round optimism.
The Indian realty sector is suffering as has been indicated by the financial performance of most of the realty companies. The road is long, with high debt, high interest rates and low demand building impediments. But once the interest rate cycle is reversed, demand could come back. Giving the huge potential for urbanization in India, the potential in the long run is immense. But for the immediate short run, it remains a big no-no. Unless you want to take positions like Buffett, with a long 4-5 year horizon but only in companies which have a strong foundation and more leveraged to the hilt. Remember, Buffett made millions by staying invested for a long term. He is not a day trader. And that is probably something we all should learn from him. Invest wisely using your own mind and intellect and maybe, you could emerge as the new Buffett of India.