Amidst Historic Highs in US Mortgage Rates, Is Warren Buffett's Investment in Housing Still Attractive?
With the rapid rate hikes by the Federal Reserve, the US 30-year mortgage rate once surged past 7.1% in October last year. In 2023, the Fed continued to raise rates to combat inflation, causing mortgage rates to rapidly climb after experiencing a slight drop at the beginning of the year. In the week ended Aug. 11, the contract rate on a 30-year fixed mortgage has rebounded significantly by 98 basis points from its February lows to reach a new high of 7.16% since 2001.
High mortgage rates can have a two-fold impact on the housing market by dampening demand and serving as a disincentive for homeowners to move.
1) Dampening demand: Increasing mortgage rates have raised borrowing costs for homebuyers while rising housing prices have led to a sharp decline in affordability and willingness to purchase homes. The drop in mortgage applications reflects suppressed demand for homeownership. According to data released by the Mortgage Bankers Association on Wednesday, the index measuring home-purchase loan applications declined for the fifth consecutive week, reaching its second-lowest level since 1995.
2) Tightening supply: Homeowners may be reluctant to list their properties for sale at this stage due to their unwillingness to relinquish much lower rates. This, in turn, exacerbates the issue of low inventory. According to Redfin, approximately 90% of homeowners with mortgages have interest rates below 6%.
Although lean inventory has generally increased demand for home construction, rising mortgage rates may prompt builders to provide more incentives to attract potential buyers. The August HMI survey also revealed that the proportion of builders who reduced prices to boost sales increased from 22% in July to 25% in August, after declining steadily for four consecutive months. Besides, in August 2023, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) reported that builder confidence in the market for newly constructed single-family homes decreased by six points to reach a level of 50.
The encouraging news is that Warren Buffett's Berkshire Hathaway recently disclosed its acquisition of positions in three homebuilders, which include $D.R. Horton (DHI.US)$, $NVR Inc (NVR.US)$, and $Lennar Corp (LEN.US)$. This move has boosted confidence in the property sector.
Considering 1) US homebuilder stocks are attractive due to their low valuations and reduced leverage, despite the cyclical nature of their earnings; 2）the persistent housing shortage creates a favorable market for these companies; 3）large homebuilders enjoy economies of scale in purchasing land and materials, as well as financing inventory compared to their smaller, local competitors, Buffett has been purchasing these stocks following their significant price gains in recent years.
Source: SeekingAlpha, Bloomberg, Financial Times
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Ajcarmo97 : Fuck no he thinks he’s trading off momentum or some dumb shit. He’s not boots on the ground, the average home buyer can’t afford those cookie cutter piece of shit Clone homes. The average real estate agent can’t Pay their bills with so little inventory. Real estate is going to suffer for 1-2 years until fed drops rates not sure why he would buy now there is no bullish catalyst
Ajcarmo97 Ajcarmo97 : I’m sure he has puts so he eats on the way down and keeps accumulating. Idk in the short term it doesn’t look good imo
71323557 : Hahahaha