This is a clip from 2012, so I consider it quite promising for the housing market, if the Oracle of Omaha digs single family homes as an investment. He would like to buy a “couple hundred thousand” of them, as a way of shorting the dollar. Never looked at it that way, but he is right. The value of a dollar is going down, yet the historical value of real estate goes up. In a sense, buying real estate is a means of shorting the dollar. Buffett has never been an active real estate investor, but he knows value, and he sees value in the housing market right now. With cheap money opportunities and low housing values, it seems the perfect storm has emerged for those with good credit. So, for those of us who are risk takers and have a long term investment outlook, I think real estate is a slow and steady wealth builder. That is exactly Warren Buffets philosophy, he has never been a get rich quick enthusiast, and wealth building from real estate is consistent with his overall value investing philosophy.
Its interesting that Buffett says he would love to buy a couple hundred thousand, cause that is exactly what hedge funds are doing right now. Hedge funds are manipulating the value of single family homes and apartments, almost exclusively! They have buyers go to auctions and pick up apartments and single family homes by the hundreds, even thousands. This is driving the cost of housing up, and eventually we will see ourselves in the same predicament we were in, circa 2007. How is this effecting housing prices you ask? Increased demand and a limited supply. So a hedge fund goes into a city and over-pays for 100 houses in that particular city, this affects the comps in the surrounding neighborhood. I say the hedge funds over-pay because the buyers are not the ones putting up the capital and assuming the risk. They are simply told to go out and buy X amount of houses in a particular neighborhood each day, week, and month. This has created a new asset class called REO to Rental. REO’s are bank owned properties and these are being bought up in bunches by hedge funds. Seems like a good idea right, but remember the term mortgage backed securities? These groups of mortgages, packaged as securities and sold on the open market, caused major problems to the entire housing market back in 2008. So, here we go again! According to a recent JPMorgan Chase report, Wall Street has already raised or committed as much as $10 billion for REO-to-rental, enough to purchase 15 percent of all bank-owned homes.
So, back to Buffett and his desire to own a couple hundred thousand single family homes. He mentions the difficulty in managing all those properties as the reason for him passing on this investment strategy. This will ultimately be the same problem the hedge funds encounter, and the reason they will eventually get out of the market. Hedge Funds will find that the cost of management, repairs, liability, will be far more than they bargained for. Being an investor thousands of miles away, with no history of being landlords and a exceptionally rigid bottom line to meet, is a recipe for failure. It is my humble opinion that the most successful landlord of a single-family property for rent, is a local mom-and-pop business with a stake in the community, and not a profiteering, unsympathetic New York based hedge fund.