Key Points
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Berkshire Hathaway bought one homebuilder outright and shares in two others.
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CEO Greg Abel appears to be betting on a housing recovery.
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The real estate market is painfully slow right now, but could it recover?
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In the second quarter, Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) was a net buyer of stocks for the first time in several years. Although the large investment in Google parent Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) received the most headlines, there were several other investments Berkshire made that shared a common theme: housing.
To be clear, Berkshire Hathaway CEO Greg Abel hasn’t specifically said that he’s anticipating a housing recovery. But all the signs point to Berkshire betting big that the near-stagnant housing market in the United States will turn around.
Three big housing moves
Over the past few months, Berkshire Hathaway has acquired a homebuilder outright and has invested in the stock of two others. Specifically:
- Berkshire acquired homebuilder Taylor Morrison for $8.5 billion. The deal closed during the second quarter, adding a top-10 homebuilder to Berkshire’s list of subsidiaries.
- Berkshire increased its existing investment in Lennar (NYSE: LEN) by about 30% during the second quarter.
- Although it’s a small position, Berkshire bought shares of D.R. Horton (NYSE: DHI) during the second quarter. We’ll have to wait and see if this is simply a starter position Berkshire plans to build over time.
It’s also worth noting that these moves are in addition to Berkshire’s existing housing exposure. It already owns the leading manufactured homebuilder, Clayton Homes, and there’s a solid valuation case that Clayton could be worth up to $25 billion on its own. Berkshire also owns Berkshire Hathaway Home Services, one of the largest real estate brokerages in the United States.
Is the frozen housing market about to thaw?
As Home Depot‘s (NYSE: HD) CEO recently put it, the real estate market in the United States is “frozen.” High mortgage rates, sharply rising home values over the past several years, and widespread economic uncertainty have caused the housing market to slow to a crawl.
However, there’s a solid argument that tremendous pent-up demand could emerge as soon as interest rates trend lower. There’s a massive housing shortage in the U.S., with most estimates determining that we need over 1 million new homes to accommodate everyone. The U.S. has generally underbuilt new homes each year since 2008, and household formation has continued to progress. Plus, there are many would-be homebuyers and sellers who simply feel stuck in place with pandemic-era 3% mortgage rates.
Of course, nobody knows when rates might start to fall, and the housing market will get a little more robust. But most homebuilders are trading at rock-bottom P/E valuations, and a bet on them now could certainly pay off handsomely if Abel is right.
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Matt Frankel, CFP® has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, D.R. Horton, Home Depot, and Lennar. The Motley Fool has a disclosure policy.