Many of the financial talking heads have been telling us that the housing sector has finally bottomed out and it’s going to turn around really soon. Robert Toll, the CEO of Toll Brothers, which is a major homebuilder, claimed that “we may be seeing the floor” back in December. Do you know which year he said that? 2006!
Warren Buffett also called the bottom of the housing market too early, which he mentioned during his 2011 letter to shareholders. He told them that he was dead wrong in his prediction.
But that doesn’t mean that Warren Buffett isn’t grinning today. Wednesday’s economic data showed us that the housing bottom is more than just right around the corner. It has actually already passed us by, and that’s obviously a good thing.
The Census Bureau in the United States of America announced this past Wednesday that the number of new homes being constructed in the United States are their highest since July of 2008. We began construction on 872,000 in September of 2012. This is a 15 percent increase since August, and it’s also a 35 percent increase from this time last year. Economists only expected to see an average of 768,000 homes being built, and that would’ve been only a modest increase.
The big jump in home starts follows a revision in August numbers, which obviously moved upwards, and a host of reports from the National Association of Homebuilders, which showed us that this sentiment has changed in the residential construction industry. Plus, the Schiller-Case home price index shows us that home prices are currently strengthening.
The Census Bureau also released further information on Wednesday, when they shared their estimate of the number of building permits that were granted in September. This is a strong indicator of home starts that will be taking place in the future. They actually granted 894,000 new permits, and this is an 11.6% gain. This shows us that the new housing pipeline is strong enough to continue with the recovery. If you look at the Federal Reserve’s commitment to keep interest rates low on mortgages, combined with six years of growth in the population bumping up against the existing home inventories, the drivers of demand seem to truly be in place to finally overcome the housing market headwinds.
Larry Sorsby, CFO of Hovnanian Enterprises said this past Wednesday: “it’s no longer a question of whether the industry is rebounding. There is clear evidence that we have bounced off the bottom and are in the midst of a recovery.”
Because of this incredible news, the capital goods sector made some of its biggest gains in a while. Hovnanian led the pack, and they reached their 52 week high this past Wednesday, and they are now trading at $4.12 cents per share. The high during the trading day was $4.19. KB Home gained eight point seven percent and Toll Brothers and added another one point eight percent to their share price.
The housing recovery is going to positively affect much more than just a homebuilders. It’s important because the new home starts are a significant indicator of economic growth. Plus, when a family purchases a home, they are going to have to buy all different types of products and services in order to fix it up the way that they like it. So companies like ADT, General Electric and Waste Management tend to benefit from a recovery in the housing market as well.
Another company ready to benefit from new home construction is Caterpillar. They are the largest retailer of heavy equipment for construction all around the world. Caterpillar has a wide variety of material haulers and earth movers, and they have more than any other company in this industry. Plus, they have a wide array of dealers which will expose their products to the homebuilders all around the country. Caterpillar is structured to be a profitable company even during a recession, but a recovery in the housing market is definitely going to boost their sales and allow their profits to soar.
The one person (and company) that has more riding on the recovery of the housing market than any other investor is Warren Buffett. Not only is his capital on the line, but his reputation is on the line as well. He made a big bet in the housing recovery during 2011, and it appeared to be a little bit too soon. But you know Warren Buffett. He doesn’t show any fear, so he doubled down on his housing bets during the past months, and he even bought a wide portfolio of home mortgages. This proves that he truly believes that single-family homes are the best investment available. Also, Berkshire Hathaway recently bought up companies like Clayton Homes, Acme Building Brands and Benjamin Moore. This proves that they are committed to believing in the housing recovery.
These aren’t the only housing recovery bets that Warren Buffett and company have going right now. They have investments in utilities, property reinsurance, home furnishings and mortgage holders. They have subsidiaries in many of these businesses, and there isn’t another company around that has such a broad exposure to the overall turnaround in the housing market. It’s not always easy to understand all of the subsidiaries of Berkshire Hathaway. But there is information and reports on the Internet that can help you do just that.