In his latest annual letter to shareholders, published this past weekend and available here, Berkshire Hathaway Chairman and CEO Warren Buffett said the U.S. will recover from the residential real estate slump by about 2011. Buffett expects this development to occur when demand from families for homes catches up with supply.
Buffett said, “Within a year or so, residential housing problems should largely be behind us. 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.”
“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. But household formations, the demand side, only amounted to about 1.2 million”, said Buffett. Clearly this is an unsustainable model.
The drop in new home construction is clearly illustrated by the production figures of Clayton Homes, a business Berkshire owns. “Our largest operation in this sector is Clayton Homes, the country’s leading producer of modular and manufactured homes. Clayton was not always number one: A decade ago the three leading manufacturers were Fleetwood, Champion and Oakwood, which together accounted for 44% of the output of the industry. All have since gone bankrupt. Total industry output, meanwhile, has fallen from 382,000 units in 1999 to 60,000 units in 2009.”
Despite the poor performance of Clayton both on a production and profit level, Buffett says the competitive advantage of the business has not declined in any way. As such he is happy holding the position for the long-term.
In terms of fixing the housing problem, Buffett also lists three methods of equating demand with supply. Buffett says, “There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.” While number two may seem to be the optimal solution for a number of parties, the Oracle nevertheless proposes number three.
Some other pieces of worldly advice from the letter:
“When it’s raining gold, reach for a bucket, not a thimble.”
“We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.”
“In my view a board of directors of a huge financial institution is derelictif it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.”
“In my view a board of directors of a huge financial institution is derelictif it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.”
“We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash-equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.”
As for the annual meeting where over 35 000 people attend, Buffett encouraged people to “come by rail”, after his acquisition of Burlington Northern Santa Fe closed.
As for the annual meeting where over 35 000 people attend, Buffett encouraged people to “come by rail”, after his acquisition of Burlington Northern Santa Fe closed.
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