People seem to be worried about a housing market crash. Warren Buffett isn’t one of them.
Buffett’s most recent 13F filing shows he bet big on the housing market. Buffett dove headfirst into the sector and bought shares of three homebuilders.
New National Association of Realtors data, however, doesn’t discount a housing market crash. It shows existing home sales in August fell to their lowest point since the start of the year.
Mortgage interest rates, which hit 7.31% last week, are their highest since 2000.
Despite that, the average U.S. home price of $495,100 remains stubbornly high. Although down from last year’s record $552,600, it’s more than double the average $212,100 price from 2000.
High interest rates and high home prices are not normal. Homebuilders do best in falling rate environments. It suggests a housing market crash could occur in 2024.
Investors can only ask, did Buffett read the market wrong? Let’s look at each of the builders he bought and see why he might have decided now was a good time to buy,whether there’s a housing market crash or not.
Lennar (LEN)
The homebuilder Buffett bought the fewest shares of is Lennar (NYSE:LEN)(NYSE:LEN-B). He purchased 150,000 shares worth $18 million.
It is the second largest homebuilder by the number of homes delivered and set to capitalize on the housing preferences of homebuyers.
In its last investor presentation, Lennar noted Florida was its biggest market, with 29% of its 50,000 or so total deliveries.
Lennar is also a diversified homebuilder. With a presence in 19 states, it offers homes across the full spectrum of first-time, move-up, active adult, and luxury. The average price of its homes is $448,000, below the national average and down from almost $500,000 last year.
Deliveries and new home orders are showing strength, despite conditions. Year to date deliveries are up 6% to 49,292 while new orders were up 8% to over 51,700.
Lennar’s stock is down 14% from its July peak of $133 per share. It also pays a 1.1% dividend.
NVR (NVR)
Buffett bought $67 million worth of NVR (NYSE:NVR) stock.
It’s the smallest of the three builders with a market cap below $20 billion. Unlike Lennar, it doesn’t pay a dividend. The stock is also down only 7% from the all-time highs it hit this summer.
NVR focuses on building homes in 15 states, primarily in the Mid-Atlantic, Southeast and Midwestern regions. The Washington, D.C. metropolitan area represents 21% of total revenue, however.
It sells homes under three brand names. Ryan Homes, NV Homes and Heartland Homes each is a different quality level. Its average selling price is $447,300, not much different from Lennar.
It’s also seeing business pick up even though everything says that shouldn’t be happening if there’s a housing market crash on the horizon. New orders are up 27% in the latest quarter just as cancellation rates are falling, dropping to 11% from 14% a year ago.
One thing that sets NVR apart is that it typically doesn’t buy land to build on until it’s ready to build. This asset-lite model makes it much more flexible to changing market conditions and keeps its capital requirements lower than the competition.
Thus, where Lennar’s trailing return on equity runs around 18%, NVR’s stands at a robust 45%. It’s likely this is one of the reasons Buffett likes this builder.
D.R. Horton (DHI)
D.R. Horton (NYSE:DHI) is both the biggest homebuilder in the U.S. and the one Buffett spent the most on.
He bought almost 6 million shares at around $121 per share for a total value of approximately $695 million.
NAR says there are 1.1 million unsold existing homes, or just 3.3 months’ worth of inventory. It’s considered a shortage when there is less than a six-month supply of existing homes for sale.
It’s why Buffett was attracted to the sector. If existing homeowners aren’t putting their houses on the market, then new home builders will benefit. It explains rising new orders and deliveries with falling cancellation rates.
D.R. Horton orders surged 37% from the year ago quarter. Its average selling price was $381,100, the cheapest of the three.
Ultimately, it looks like Buffett didn’t read the market wrong at all. In fact, he read it just right.
Because these are otherwise strong, financially secure businesses, they will survive even if the housing market crash happens.
On the date of publication, Rich Duprey did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
