BUFFETT: HOUSING IS IN A DEPRESSION
14 NOVEMBER 2011 BY CULLEN ROCHE
Over the weekend I posted a video by David Rosenberg claiming that we are in the middle of a modern day depression. I don’t exactly agree with that idea and I think that Warren Buffett did an excellent job explaining this on CNBC this morning. Buffett says the U.S. economy is actually incredibly bifurcated. Gauging his Berkshire businesses, Buffett says that much of the U.S. economy is actually very strong and reaching new highs. On the other hand, he says anything related to residential real estate is actually in a depression. With a D. Unfortunately for the U.S. economy, residential real estate happens to be one of the most important industries we have and residential real estate just so happens to be the U.S. consumers largest asset. So, I think it’s accurate to say that this one component of the economy is making the USA feel like it’s in the middle of a depression even though many industries are actually doing quite well. More …
BY CULLEN ROCHE
Interesting comments here from an article in The Economist this past week. They touch on the relative value of real estate vs equities:
“Anyway, to take a more cheerful line, the fall in the housing markets is creating some bargains. A recent postshowed that US house prices look cheap relative to gold. The chart shows that they also look a much better bet than the stockmarket, on a long-term view. Judging by the latest plunge in pending home sales, it doesn’t appear that many bargain-hunters are interested.”
Given the 30%+ decline in housing and the incredible rebound in equities I can’t help but wonder if true value investors aren’t in agreement with the conclusions above. Despite all the attempts to manipulate the real estate market, the government has largely failed in attempting to stabilize prices. In other words, it’s undergone a much more natural price discovery process. The equity market, of course, has been intervened in at every step of the way and the government has undoubtedly succeeded in propping up this market. Various valuation metrics are at odds with regards to equities, however, it’s difficult to conclude that we’ve done anything other than engage in the same old tactics that helped create the unstable environment that existed before the equity market crash. Given this risk and what I’d call a more natural price discovery process, it’s not unreasonable to conclude that real estate looks like a better relative value vs the broad equity markets at this juncture.