Berkshire Bets on Housing Market

Berkshire Bets on Housing Market

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Hathaway Berkshire, the company owned by tycoon Warren Buffet, has bet heavily on a resurgence in the housing market.  The company has agreed to lend its trusted brand to a new venture with Brookfield Asset Management.

The conglomerate will be the majority owner of a network of franchised real estate agencies through its HomeServices of America subsidiary.  Brookfield will contribute its network of more than 53, 00 estate agents, responsible for $72 billion of residential real estate sales last year.  HomeServices of America acquired the business from Prudential Financial, but did not acqure the rights to the Prudential name.  The realtors will begin to offer services under the name Berkshire Hathaway HomeServices from next year.

The move represents a significant investment of cash and credibility in the housing market.  Mr Buffet told CNBC last month that he confidently expects the US housing market to continue ‘inching ahead.’  Mr. Buffet expressed the opinion earlier this year that the US economy was in for a ‘steady and substantial comeback,’ but told CNBC that right now there was ‘no question’ that global growth was slowing Mr. Buffet told Becky Quick on CNBC’s Squawk Box on October 24.

Mr. Buffet, who famously told shareholders in Berkshire Hathaway in 2011 that he was looking for a ‘major acquisition’ and that ‘our elephant gun has been reloaded, and my trigger finger is itchy,’ told Ms. Quick that his company wouldn’t be attempting leveraged buys, saying that ‘it doesn’t factor into our thinking… we’re buying on an all equity basis.’

Mr. Buffet has reasons to be bullish on the housing market.  After years of falling sales and decreasing economic output, the US housing market is resurging.  That’s because reduced prices and record low interest rates are tempting homebuyers back into the market.  The housing market has responded, too: housing starts rose faster in September than at any other time since July 2008, after seasonal adjustments.  And Mr. Buffet told his shareholders in February that the housing market would improve, pointing to figures that showed the number of new households being formed exceeding the number of new house starts and explaining the phenomenon: ‘people may postpone hitching up during uncertain times, but eventually hormones take over.’

Home Service is the second largest full service residential brokerage firm in the US, built up by buying up real estate brokerages from around the country following the initial acquisition with the Midwestern utility company in 1999.  It’s one of over 70 different companies forming the Hathaway Berkshire conglomerate, and only one of the ways Mr. Buffet’s companies are betting on the US housing market’s buoyant future.  Berkshire has also acquired a brickmaker and this month agreed to pay $1.5 billion for a portfolio of home loans from Residential Capital, the bankrupt mortgage lender.  The offer will need to be approved by the bankruptcy court and Residential Capital’s creditors may also challenge it.

Mr. Buffet’s attempts to have a finger in every pie the housing market can offer presumably indicates his faith that exposure to the property market can help his company achieve what he wrote his shareholders was his ‘primary objectives of redundant liquidity and unquestioned financial strength.’ Mr. Buffet has plenty of evidence on his side, from post-Sandy analysts predicting a boom in construction on the East Coast to premium realtors in California who are seeing sales and prices rise together.  But he has been wrong before.  In last year’s letter to shareholders Mr. Buffet made the same predictions and ‘I was dead wrong.’  This year, he looks more likely to be proven right.