Warren Buffett is awesome in so many ways. That’s why I hate having to call him out for giving bad advice to home buyers and real estate investors (those aren’t necessarily the same things). Uncle Warren says he’d buy fist-fulls of single-family homes if he could given the broad decline in home values across the U.S. Well, he really could with all of the cash Berkshire Hathaway controls, so why doesn’t he? Let me explain.
Mr. Buffett likes the principle of buying anything at a discount and he can’t help but sound off on a general trend. The trouble with applying discounting to home buying is that value in real estate always comes from three things: location, location, and location. Part of the problem with the U.S. housing market is that too many single-family homes were built too far from viable communities. The San Francisco Bay Area gives me more evidence of this than I care to see. The most depressing drive I made in 2011was a long loop northward through the Dublin / Pleasanton area along the Hopyard / Dougherty corridor past clusters of brand new suburbs. Those suburbs are not tied to any major economic drivers that I could see. There were no factories, mines, or power plants around. These McMansion non-neighborhoods are car-focused in an age when cheap oil is increasingly more difficult to extract. I am not one to buy real estate that has little chance of ever being economically viable.
Uncle Warren’s remarks remind me of the comments he made at the height of the 2008 financial crisis when he stated his willingness to buy a bond insurer that was in trouble, if only it could truthfully estimate its value. It couldn’t, of course, so Mr. Buffett’s comments only provided clarity. He did not act on his own advice but anyone who did got fistful of very questionable equity.
It’s unfortunate that some money managers still have more money than sense. Private equity funds are actually taking this approach seriously and are raising money to buy large numbers of distressed residential properties. It’s ironic that the story leads off with an auction in my very own greater San Francisco suburban area, as if the buyer couldn’t see what I see. Good luck with that. The REIT numbers work for large apartment complexes because those properties are located in viable large cities. Running the numbers for single-family homes means these private equity funds will be bidding for homes that never should have been built because they are too far from civic life for an affordable commute. I suspect these ambitious funds will be very disappointed with their yields when they discover that renters no longer want to live an hour away from their jobs. Maybe throwing a random comment out to the crowd is Mr. Buffett’s way of seeing how many investors will go for it, thus clearing the field of people who can’t see nuances.
Warren Buffett has nothing to worry about. He’s been living in the same home for fifty years and has been working from it for much of that time. Smart money managers should do as he does, not as he says. I work from home too.