Warren Buffett Weighs In On The Housing Bubble
Hold on to your hats because the Oracle from Omaha just threw a ton of controversy into the bubble discussion. "He and Munger issued stern new warnings about the residential real estate 'bubble,' the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States."
Buffett may have been reading this blog! "A lot of the psychological well-being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]."
"We're like an incredibly rich family that owns so much land they can't travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can't see. They trade away a little piece every day or take out a mortgage on a piece."
"Buffett to Munger: 'What do you think the end will be?' Munger: 'Bad.'"
11 Comments:
Dan,
Greenlander did a good job of explaining the situation. I would add that a builder I know will secretly tell me about how much they mark up what the subs charge them. To think all these stucco-buyers are paying a premium for chicken wire and foam out here in the desert!
It really seems that peiople buy into any justification. On the coasts, they don't have land. In the city, its the commute and shopping. Out in the middle of nowhere, they point to how much prices have gone up. This mania is so complicated, it needs a book to explore the psychology.
The Buffett comments may blow the lid off this bubble. Good to hear from you Dan.
Reminds me of the tale during the late 80's of Australia selling its Tokyo consulate, then paying off its budget deficit with the proceeds.
and land would perhaps be numero uno in consideration of the house prices, given the saying "they don't make it anymore, if technology didnot exist for vertical development.. so same piece of land can support few to few hundreds of families (of course county regulations would apply)..
moreover, the same technology which made our PCs, DVDs, Cars cheaper do lower the construction costs as well (raw material/labor cost included)
I don't think Buffett's comments are going to make any differece. Smart money already knows what's comming and is out of RE for some time already.
The guys that are buying right now may not even know who Warren Buffett is.
"i believe the cost of real estate is driven by "location, location, location," not building costs, building costs, building costs."
First of all, the famous "location, location, location" referred to RETAIL space, not residential. Primarily it referred to how much customer traffic a store was going to have and its demographics, thus how much revenue (and assumeably profit) it would have.
This has NO context in residential RE, unless you are renting the house out and its location makes a difference.
"you know you bought in the right neighborhood, when they start knocking down 4,000sq.ft houses to build something new."
That just means you will have stupid neighbors ! Desireability is important, but *most* home locations are interchangeable and anemities mean as much or more than location. There really is no shortage of desireable places to live in most cities.
"i can have a house built for $85 a foot, whether it's on the oceanfront or ten blocks inland. trust me, the house on the oceanfront will go for seriously more money.."
Sure it will. Who wouldn't want to live on the ocean ? (Other than the storms and salt damage and the commute.) However, aside from oceanfront property and maybe not even then, there IS NO LAND SHORTAGE and thus no reason for land to be appreciating uncontrollably.
"given the saying "they don't make it anymore"
This is another misused quote ! While they don't make it any more, when was the last time you couldn't buy land ? There is tons and tons of it just about everywhere and the return on that land has to justify its price !
Lets remember something else: residential construction only occurs where are jobs and jobs require commercial real estate. If the price of land is sky high, businesses won't be locating there.
That is one really telling sign about the RE boom: it seems to be residential only, not commercial. I don't hear of any businesses having trouble finding space/land, which leads me to believe that we have a lopsided boom. For me, lopsided = unsustainable.
Prime vacation property may be the exception to the rule, but "location, location, location" was referring to retail and nothing else.
If you go to LV and other places, there is land as far as the eye can see. It is not rare.
Furthermore, the prices you speak of clearly aren't reflective of a properties earning potential. Yes, some people will pay $300K for a certain location, just like they will pay $1000 for a bottle of wine and $150 for a restored muscle car. However, for the vast majority of us, there is no shortage of land.
realist: do you think the purchasers would have paid $300K if they *knew* the price of the land wasn't going to go up any further ? I doubt it.
Of course I don't think that Montana land is the same price as Manhattan.
Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, DC. "
I live around New York City... and i always love when someone say: "They're not making anymore land." ... and i always say: "No, they're not. But they're certainly re-developing it."
"U-Haul truck rates for out of state route are 3 to 4 times of the same route in the opposite direction."
Yes, but you're not counting the folks coming over the border. They generally don't use U-Hauls.
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