Predictions of the Future of Real Estate in 2011
Predictions, in this day and age, can sometimes be scary, sometimes anticipated. Who do we listen to when we speak of predictions? Shamans? Prophets? Or do we listen to someone who only takes action once a year, and be considered one of the most successful investors in the world?
Warren Buffet, billionaire investor, may just have something up his sleeve. He has predicted a rise in the real estate market that has local investors and businessmen panting in anticipation. In a yearly letter to the stockholders of Berkshire Hathaway, he has foreseen a positive recovery of the beleaguered market when the demands for homes will catch up with the excess supply of foreclosed homes created by the financial crisis more than a year and a half ago.
Is there light at the end of the tunnel at last? Maybe.
In his letter, Buffet wrote that “within a year or so, residential housing problems should largely be behind us. Prices will remain far below ‘bubble’ levels of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.”
The prediction may come as a welcome relief to the company’s shareholders. But the historic real estate crisis has drastically affected some of Berkshire Hathaway business units. Home Services of America, Inc., of Minneapolis, the nation’s second-largest independent residential real estate broker, is controlled by the Omaha-based Berkshire Hathaway through a subsidiary. Nine percent of its profits fell to $187 million before taxes. A maker of prefabricated houses, Clayton Homes, and the carpet maker Shaw Industries, saw a harrowing thirty percent drop in earnings.
Which will have a harder and much longer time to recover? These will be the high-value houses and those in certain localities where overbuilding was particularly rabid. One of the primary causes of the housing market crash sited by Buffet was overbuilding. It was just a simple case of violating the basic Law of supply and demand. Before the crisis, the demands for houses were paced at two million units per year. Just before the crash, the demand had dropped to only 1.2 million, way behind the supply at hand.
The ‘housing bubble’ has resulted in a favourable end to the gold rush psyche of construction companies to build more houses than the actual demand for them. Warren Buffet jokingly wrote that that was the best possible solution to the other two which are: if the country decides “to blow up a lot of houses…in a tactic similar to the destruction of autos that occurred with the ‘cash for clunkers’ program” or “speed up householder formation by, say, encouraging teenagers to cohabitate, a program no likely to suffer from a lack of volunteers.”
Are these predictions really what they appear to be? Or are they just simple deductions to a basic principle of ‘what is down has nowhere else to go but up’? Simple deductions these may just well be. But if it comes from someone who is as successful as Warren Buffet, everyone will just have to stop and listen.
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