Buffett's Bullish Stance On Homebuilders: A Contrarian View In Uncertain Times

On Tuesday, Home Depot reported its quarterly outcomes that surpassed market expectations. With a 2% decrease in the company's quarterly comparable sales for Q2, it appears that the homebuilding industry as well as the housing market behind are still struggling.

 

In fact, a revealing metric from July's Home Purchase Sentiment Index by Fannie Mae indicated a concerning trend: only 18% of Americans felt it was the "right time to buy" house, equalling the record-low sentiment. Such sentiment not only reflected the current slump in housing market but also reflected peoples' concerns about soaring property prices and less-than-ideal mortgage rates.

 

This marks a completely different trend compared to the housing market during the pandemic: Between 2020 and 2022, while the pandemic "locked" people in their houses, it also increased the need to enhance living spaces since people were spending more time at their home. At the same time, the extremely low interest rate during the period also drove the mortgage rate down, making it really appealing for people looking for buying houses. All these factors led to a surge in home acquisitions and skyrocketed home improvement expenditures, thus benefiting companies like HomeDepot and the home building industry.

 

However, after the pandemic was over, when every other industry were on their way to recover, it seems like the homebuilding and the housing industry went to a different route, as many Americans curbing their budget and expenses for home improvement.

 

Despite this situation, Warren Buffett sees a different picture. On Monday, the 93-year-old's Berkshire Hathaway disclosed its 13-F filings and they showed the company made substantial investment in three leading U.S. homebuilding companies: D.R. Horton, Lennar, and NVR. Specifically, these series of investment include a purchase of 6 millions shares in D.R. Horton, 152,572 in Lennar, and 11,112 in NVR, valuing over $800 million.

 

Given the complex dynamics of the property market—where higher federal rates have been a dampener—it's somewhat surprising to see such a move. Buffett's decision might be backed by insights from his real estate brokerage ventures, despite their declining profits.

 

A weak property market often leads homeowners to delay selling, waiting for a potential market upturn. However, a drop in the sale of second-hand house means new constructions would be primarily catered to the housing demand, and this scenario would benefit house builders immensely. Therefore, a recovery in new home sales has been seen this year, as June 2023 witnessed a year-over-year growth of 23.8% in new home sales.

 

Meanwhile, it is also worth noting that many homebuilders are looking to boost affordability and entice potential buyers: Nowadays, homebuilders have opted to reduce the effective prices of houses with affordability measures such as mortgage rate discounts, cashback incentives at closing, and direct price cuts on properties.

 

"To address affordability concerns in the market, we introduced increased incentives into the market and adjusted base pricing of our homes where necessary. Our most successful incentive recently has been interest rate buydowns. We are generally offering a point below market on a 30‐year fixed rate mortgage for the life of the loan," D.R. Horton CEO David Auld said earlier this summer.

 

Highlighting this trend, major homebuilders like D.R. Horton and Lennar have recorded a remarkable growth of 38.0% and 36.2% respectively in stock value this year. Following closely is NVR with a 33.5% surge. In comparison, the S&P 500 Index grew by 16.3% within the same period.

 

In fact, there could be more "good" news for homebuilders lying ahead, as Deutsche Bank recently published a report suggesting that the U.S. housing market merely experienced a mid-cycle disruption last year and the persistent housing supply shortage could last for years, ensuring homebuilders will be "busy" in the foreseeable future.

 

"It is hard to pinpoint exactly how underbuilt the country is, but I firmly believe we are still in an extremely undersupplied housing market, for both new and existing homes, likely for years to come due to development and construction capacity constraints in the industry," D.R. Horton CEO David Auld also agreed with the idea.