Buffett's Big Bet On U.S. Housing: 3 Ways To Play The Recovery

 |  Includes: AIG, BRK.A, FNF, MTG
by: Investment U

by Mike Kapsch

Warren Buffett's predictions last year were premature. But this year, his premonitions just may be spot on. And there are five little-talked-about reasons why... Several years ago, Warren Buffett was asked how he and his partners managed to make so much money investing in the markets. Buffett confidently answered, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Our readers hear a lot about this type of investing. It's better known as "contrarian investing." And on Monday, Buffett proved once again that he's one of the biggest contrarians in the world. That's because Berkshire Hathaway (NYSE: BRK.A) put in a $3.85-billion bid to buy a mortgage business and loan portfolio from now bankrupt Residential Capital LLC. There's no doubt the housing market in America is still in a very shaky state. As The Wall Street Journal reports, "Pessimists insist that… prices will continue falling – perhaps as much as 20% or more." Plus, it's not even the first time Buffett placed a bet on the U.S. housing recovery and lost. His predictions early last year were premature.

But this year, his premonitions just may be spot on. And there are five little-talked-about reasons why…

  • Housing Recovery Fact #1: In May, more permits to build homes and apartments in the United States were requested than in the past three and a half years. The U.S. Commerce Department also confessed that April was much better for housing starts than first thought – increasing figures to 744,000 from 717,000.
  • Housing Recovery Fact #2: Earlier this week, the Joint Center for Housing Studies at Harvard University released a report revealing new home inventories are at record lows. This is important for housing's rebound because declines in listed inventory lead to less pressure on falling home prices. In fact, it's a big reason why average U.S. home prices actually edged higher the last two months.
  • Housing Recovery Fact #3: So far, in 2012, U.S. employers added over one million jobs. As a result, the unemployment rate has dropped a full percentage point since August, from 9.1% to 8.2% today. And as this number heads lower, you can be sure the housing recovery will gain momentum.
  • Housing Recovery Fact #4: Last week, mortgage rates hit their lowest number since offering long-term mortgages began in the 1950s. For potential homebuyers, figures like these are simply impossible to ignore. Plus, in many places paying a mortgage today is even cheaper than renting a home of the same size. (Although, always remember, you have to pay for everything that happens to your home when you own it.)
  • Housing Recovery Fact #5: Peruse online and chat with industry professionals and you'll see sentiment about the housing market is changing. Today major media outlets like MSN, The Economic Times and The Wall Street Journal are all reporting that right now is the time to buy a home. And it helps that investors like Buffett are backing them.

As the economy improves, bargain home prices and record-low mortgage rates will bring consumers back into the market and help home prices jump higher sooner than most people think. This scenario is also set to benefit housing stocks, as well, many of which are down over 50% from their pre-crisis highs.

Of course, you probably aren't in the position Buffett is to just buy assets outright from a bankrupt housing company. So here are some other options to consider.

Three Ways to Play the Recovery

Real estate investment trusts, better known as REITs, are just one way to play the housing rebound. Last September, our colleague Jason Jenkins suggested taking a look at Vanguard REIT Index (NYSE: VGSIX). In addition to yielding 3.14%, VGSIX is up 26% to date.

Another option you should look into is investing in mortgage and title insurance companies like Fidelity National Financial (NYSE: FNF), MGIC Investment Corp. (NYSE: MTG) and even American International Group (NYSE: AIG).

Don't take it from me, though. Go see for yourself that a number of housing stocks are on the rise right now. And if the stock market is any indicator of things to come for the broader economy, I'd say a full-on U.S. housing recovery is just around the corner.

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