Warren Buffett just made a big bet on the U.S. housing market

August 15, 2023 ndowd

In total, Berkshire Hathaway bought 5,969,714 shares of D.R. Horton, 152,572 shares of Lennar, and 11,112 shares of NVR. Those shares are worth over $800 million—with more than $700 million of it being in D.R. Horton.

While Berkshire Hathaway CEO Warren Buffett did not publicly state the motive behind this investment, these stock purchases do coincide with a remarkable surge in U.S. homebuilder stocks.

This year has witnessed an impressive performance in the homebuilder sector, with D.R. Horton and Lennar up 38.0% and 36.2%, respectively, year-to-date. Not too far behind is NVR, which is up 33.5% this year. For comparison the S&P 500 Index is up 16.3% this year.

The driving force behind this growth can be attributed to the fact that new home sales in 2023 have rebounded somewhat, following the sharp pullback that took place amidst last year’s mortgage rate shock-induced housing slump.

This new construction improvement has translated into new home sales climbing 23.8% year-over-year in June 2023. That said, new home sales are still 32.2% below the cycle’s peak which occurred at the height of the pandemic housing frenzy in August 2020.

One key reason that new home sales have rebounded lies in the innovative strategies implemented by homebuilders to enhance affordability and attract buyers. Unlike the existing home market, where inventory remains tight and house prices remain sticky, homebuilders have lowered their net effective house prices. These affordability adjustments range from offering mortgage rate buydowns, money back at close, and price reductions on properties.

“To address affordability concerns in the market, we introduced increased incentives into the market and adjusted base pricing of our homes where necessary. Our most successful incentive recently has been interest rate buydowns. We are generally offering a point below market on a 30‐year fixed rate mortgage for the life of the loan,” D.R. Horton CEO David Auld told Fortune earlier this summer.

Moreover, the homebuilding sector has benefitted from the scarcity of existing inventory available in the market. This scarcity, combined with the aforementioned affordability strategies, has further heightened the appeal of newly constructed homes. The resultant competition for a limited pool of existing homes has pushed potential buyers towards considering new home options, boosting the sales figures for homebuilders.

And that housing shortage could last for years.

Indeed, Deutsche Bank recently released a paper that concluded that the U.S. housing market was simply navigating a mid-cycle crisis last year, and the shortage of housing supply would keep builders busy in the years ahead.

“It is hard to pinpoint exactly how underbuilt the country is, but I firmly believe we are still in an extremely undersupplied housing market, for both new and existing homes, likely for years to come due to development and construction capacity constraints in the industry,” D.R. Horton CEO David Auld told Fortune back in June.