On Saturday Warren Buffett released the Berkshire Hathaway annual report for 2009, accompanied by his customary shareholder letter. It won’t hit mailboxes in printed form for a little while, but undoubtedly many people will read it online long before it gets to them. I thought I’d dedicate a post or two to sharing what I see are some key points emanating from the brain of Buffett via his shareholder letter. I’ve always felt this was an entertaining and informative read, and this year has not been a disappointment. You might wonder why you should care what Warren Buffett thinks. Like anybody else, he has made some good calls and has been off base about some things. (I should point out that when he's wrong it's usually a matter of timing, and it happens much more infrequently than when he's right). Regardless, through the companies he owns and the people he knows, he has an almost unequaled perspective on the American economy. He also has a very rational view of the world, unencumbered by politics, and to a large degree, personal political ideology. The engine of Berkshire is the insurance business. They own banks and other financial services companies, as well as having major exposure to residential real estate. The roots are based in basic, industrial companies. In other words, Berkshire is directly exposed to pretty much all of the areas of the economy that have caused great concern over the past couple of years. Although Buffett may be hands-off to a large degree in the operations of most of his businesses, he knows precisely what is going on in all of them. The last obvious point in favor of lending credence to his views is simply that his investing performance has been unparalleled.
One thing about the letter that is clear right off the bat is the fact that he felt the need to restate the basic tenets of owning Berkshire Hathaway. The Berkshire Owner’s Manual is posted online on an ongoing basis. Recently, however, Berkshire’s B shares have split 50 for 1 to facilitate the purchase of Burlington Northern, and there has been a huge influx of new shareholders. For that reason, Buffett seems to give more attention than in most years to reiterating the overall philosophy of Berkshire Hathaway. While it’s true that he reinforces basic concepts every year – and really every chance he gets - this remains valuable information whether you’ve owned shares for several decades, or you are merely interested in learning from a great investor.
Perhaps the most universally interesting topic Buffett addressed was the state of residential real estate. He may not typically be associated with this industry. However, as he points out in the letter, Berkshire-owned MidAmerican Energy in turn owns HomeServices of America. HomeServcies owns a broad collection of regional realty firms that combined make them the second largest real estate brokerage firm in the US. Additionally, their website specifies that they are the “largest brokerage-owned settlement services (mortgage, title, escrow and insurance) provider in the United States.” Berkshire also owns Clayton Homes, which has become the largest maker of modular and manufactured homes in the US. This is all a long-winded way of saying that Buffett has a pretty good vantage point from which to view the problems and opportunities facing residential real estate.
First, some numbers. Total industry output of manufactured homes has dropped from 382,000 in 1999 to 60,000 in 2009. That has led to the bankruptcy of 1999’s top three manufacturers. More generally, housing starts in the US have dropped to a fifty year low, at 554,000. (For some context on the trend of housing starts, see the chart at the bottom of this post.)
At last year’s annual meeting, Buffett talked at some length about the supply and demand dynamics in real estate, and how prices will start to pick up again when we work off the excess inventory that existed then in the system. Typical, rational view of things, and of course he had the numbers at the tip of his tongue.
The big news coming out of this discussion? Warren Buffett believes that within the next “year or so” our housing problems should be largely behind us. Of course, housing is overwhelmingly a local phenomenon, and there will be regions that continue to feel the effects of overbuilding well beyond 2011. Furthermore, the upper end of the spectrum in many areas may still be years away from real recovery. For instance, I recently saw data for the Phoenix area that indicated that inventory for homes under $400,000 was actually approaching neutral, meaning that it didn’t particularly favor buyers or sellers. However, above $3m (I think…may have been $2m) there was enough inventory to serve buyers for over five years! Note: don’t hang your hat on these numbers as they are approximate and a couple of months old. The point remains, though.
We may still be in for some bumps, but I suspect it’s comforting for most people to hear one of the most rational players in American business state that there’s light at the end of the tunnel.
Housing Start Data, courtesy of the US Census Bureau