Housing Market Rebound on the Way & What to do

Warren Buffett says that the U.S. Housing Market Rebound is Happening.

According to a March 1, 2010 story by Bloomberg reporter Andrew Frye, billionaire Warren Buffett has said in his February 27, 2010 letter about the economy and his company (Berkshire) that the housing market rebound is happening and should be corrected towards the end of this 2010, with 2011 hopefully being a much better year. “Within a year or so, residential housing problems should largely be behind us,” said Buffett’s annual letter to his shareholders, in which he recorded his thoughts on the housing market rebound.

Mr. Buffett indicated that he believes one of the reasons for the last couple of years of housing business slump was due to overbuilding. Berkshire, Mr. Buffett’s company, owns a real estate firm that builds prefab homes and also manufacturers products for house construction. His firm earned about $187 million pretax dollars in 2009, so he knows something about the home construction industry. Tom Russo at Gardner Russo & Gardner has Berkshire stock. Russo said that Buffett has positioned his company for the coming and in-progress housing market rebound.

Those of us watching and evaluating such events can only surmise that if a solid investor like Warren Buffett is using his own company’s capital to ready them for the housing market rebound, that it must be not only coming, but that it is in the process of happening.

Housing market rebound due to existing inventory being consumed.

Mr. Buffett, one of the most successful businessmen and stock investors the world has ever seen, said that the slump during the last couple of years was simply mismatched supply and demand. He said that the demand for new homes in the U.S. is typically around 1.2 million new homes a year. But Buffett said that the supply side of this equation was running about 2 million new homes a year being built just a few years ago. This means that America has been creating about 800,000 more homes a year (66% more) than it needed and we are now working our way through this mass of food heaped onto our plates. Prices have fallen, but the demand remains, so Buffett feels that during the next several weeks and months, we will see this glut of overstocked homes reconciled with demand. When this reaches that point, home design and construction will resume and this forms the basis of this housing market rebound.

Mr. Buffett further commented that in areas where overbuilding ran amok, it will take somewhat longer to correct. His point here is that if a given community has more homes than the demand called for, then those overstocked homes will need to be purchased prior to more being built. If you happen to be in an average American community, then hopefully Mr. Buffett’s prediction will be the case in your area.

Another reason for our nation’s economic woes are related to irresponsible loans made by lending institutions.

Logical Things That May Happen During the Rebound

If logic has anything to do with learning from our past mistakes, here are some of the things that this architect believes could and should happen to hopefully avoid similar problems in the future.

1. Lenders should make loans, but to people and businesses that have the ability to pay them back, over time, as the mortgage intends. Mortgages should be what they were first intended to be: loans to people who want a home, rather than as a Wall Street investment that is marked up and sold for cash to other investment institutions who, in turn, sell them as “securities” to an unsuspecting public who take it on the chin when bad risk loans default.

2. Home builders and developers would be advised to have presales of homes they are building before commencing construction. Homeowners should be encouraged to have homes built for themselves, not as “investments.” If you get overextended with expensive mortgage loans, and your income drops or is temporarily discontinued, you can lose everything, which starts a cascade effect through our economy. Better to build homes that people want to live in when the construction begins, rather than viewing these new homes as a way to possibly make a quick buck.

Housing Market Rebound and Your Community

Let’s put this in perspective, shall we? If you live in a small mountain home community like my family does (Cashiers, NC), and let’s just guess that the annual home buying demand is around 403 homes a year. Okay, so if we were subject to the same average overbuilding that the rest of America was, then we must have had a construction rate of 66% higher than that demand, meaning that we are presently working our way through 403 x 0.66 = 266 too many homes built that need to sell before a normal construction rate can resume.

Cashiers home sales market data furnished by local Cashiers real estate broker Merry Soellner at www.CashiersNCHomes.com .

What You May Wish to Consider Doing During the Present Recovery:

When you are lost in the woods, you may not be able to see the forest for the trees. In other words, we are in the recovery now, but we are so consumed with each of our issues we can’t feel it or obviously see it, even though the overbuilt homes are being consumed, one by one, day by day, all around us. That means the day will soon be coming in your community that home construction will be resuming.

Merry Soellner Mountain Properties, a Keller Williams real estate broker, said that just today their entire staff had a meeting with a SunTrust representative. This SunTrust loan officer said that the Fed is discontinuing the purchase of mortgage backed securities effective March 31, 2010. He said that this means that housing mortgage interest rates will soon be rising.

THINGS TO CONSIDER DOING NOW AND THROUGH 2010 TO REDUCE YOUR COSTS ON YOUR NEW HOME DURING THE HOUSING MARKET REBOUND:

A. Anyone considering building a new home for themselves would be well-advised to obtain their financing as soon as possible, because rates will be rising soon. It seems that the lowest rates are likely to go RIGHT NOW. Understanding this, ACT NOW to obtain your financing for your new home.

B. If you are considering having home architects design your new home, ENGAGE YOUR HOME ARCHITECTS NOW. Get them to work immediately.

Comments from Warren Buffett for those who prefer to “wait and see” and make sure times are fully recovered before acting:

“Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance…We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend.”

In other words, if you wait until you are absolutely, positively 100% in the middle of the completely corrected housing market, you will get to suffer higher prices for construction, because builders and architects will once again be busy meeting renewed normal demand, once the overstock is gone. You will also pay higher interest rates for your home construction loan, as rates start to go up in the next couple of weeks. Usually once rates begin to rise like this, they continue to rise through the correction period. To give you an understanding of what a 3% rate increase in a mortgage note could do to a home whose loan value is $750,000 over 30 years: that could add somewhere in the vicinity of an additional $553,730 in payments! You could end up paying another half-million dollars over the life of your loan because you waited for what Mr. Buffet calls: “meaningless reassurance.” This is based on a present mortgage rate of 6% 30 years fixed rate versus 9%. Each of your monthly payments would be increased by $1,538.40 because you decided to wait for the “meaningless reassurance.”

So what should you do? Act now. You have one of the smartest, most conservative, successful investors in the world taking advantage of this housing market rebound, why can’t you? Especially if you have already decided to have a new home designed and built, but you were just waiting for the “right time?” Now is the right time.