The Oracle of Omaha is bullish on housing – and he may not be alone

When Warren Buffett talks, people listen. In particular, the Oracle of Omaha gets investors’ attention when he issues his annual Berkshire Hathaway shareowner letter, a frank and enlightening assessment of the economy and investment outlook. What jumped out in this year’s letter released last week: Buffett is bullish on housing again, and he’s putting his money where his mouth is.

In his letter, Buffett notes that, “a housing recovery will probably begin in a year or so. In any event, it is certain to occur at some point.” He said that “home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates,” adding, as an aside, that “the third best investment I ever made was the purchase of my home.” The first two, he says, were wedding rings.

Consequently, Buffett told shareowners, he has made several strategic investments in the housing sector in recent months. Among these are five corporate acquisitions in the building components field, a $50 million acquisition of a brick manufacturer, a new $55 million roofing plant for Johns Manville, and $200 million capital expansion of his Shaw Industries carpet company.

“Buffett doesn’t spend money unless he thinks he’s going to make money,” Jeff Matthews, hedge fund manager and author of Pilgrimage to Warren Buffett’s Omaha, said in a recent interview. Matthews said Buffett’s housing bullishness is “interesting because that didn’t happen last year and didn’t happen the year before that.”

The legendary chairman of Berkshire Hathaway isn’t the only one suggesting a turnaround in housing may be at hand. The Wall Street Journal ran an article recently headlined, “Why 2011 May be the End of the Housing Crash.” The Journal gives a number of reasons as to why we may have seen the bottom, including the fact that housing is the most affordable it has been in decades.

Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years, Moody’s Analytics says. Prices usually average close to two years’ pay, although that varies nationally.  At the peak, midway through the last decade, a home in Los Angeles, the Journal said, cost the equivalent of 4.5 years’ pay. The average price has since fallen to just over two years’ income now. That’s well below its pre-bubble average of 2.6 years.

“Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own,” says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.  Such analyses are “definitely bullish,” the Journal said. “Housing prices will probably bottom in 2011,” agreed Scott Simon, a managing director at money-management firm Pimco in Newport Beach. His views are important because Simon foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.

The Journal also points out that investors are stepping up to buy real estate, which is usually another sign that the market has bottomed out or is near a bottom. In some instances, they’re paying entirely in cash. “That’s a far cry from the heady bubble days when borrowed money seemed the key to riches,” the paper reported.  “It’s a sign that these investors are betting on a rebound.”

Finally, one other story caught my attention this week. The Sacramento Bee, interestingly enough, ran a piece on the growing Bay Area economy, noting that, “Silicon Valley is starting to pop again.

Green tech is alive, as is anything in social networking. Venture capitalists are investing. Google is hiring 2,000 workers this year; Facebook is moving into new quarters with room for hundreds of additional employees” and Skype’s Palo Alto office is doubling its local employment.

What’s happening in Silicon Valley, and throughout the Bay Area, is a striking example of California’s “bifurcated recovery,” said Stephen Levy, the noted economist and director of the Continuing Study of the California Economy in Palo Alto. Simply put, the Bee reported, “Inland California remains depressed while coastal California is showing life.”

Why the split? Experts told the Bee that the California economy doesn’t recover all at once. Coastal industries like technology and international trade are doing better and wealthier Californians, who tend to live on the coast, are enjoying greater gains in the stock market over the past couple of years.

What to make of all this? It gives me reason for optimism that the real estate market in general – and the Bay Area market in particular – may see much brighter days in 2011. As the economy continues to mend, it’s reasonable to expect some of the greatest economic gains to be in the tech sector in Silicon Valley and the financial and biotech sectors in San Francisco and the Peninsula. That bodes well for our local housing market.

Below is a market-by-market report from our local offices:

North Bay – March is off to a strong start, our Greenbrae office reports.  A nice ranch style home in Novato, well presented with a pool had 18 offers.  The market is hungry for new inventory, so what is coming on the market is generally getting snatched up pretty quickly.  We are waiting to see if the spring inventory satisfies buyer’s needs, or if it only scratches the surface.   Many agents are getting new listings ready to put on the market and many agents’ clients are getting frustrated in not finding what they are looking for.  While buyers still seem to have no real sense of urgency, they are more apt to pull the trigger faster when they see something they like. In Southern Marin, inventory continues to be light, but there is promise of more properties coming on in the next few weeks.  Buyers are still hesitant to step up to the plate. Northern Marin agents continue to see strong turnouts for their Sunday open houses with positive feedback.  More floor calls have been coming into the branch from people looking to get information on properties.  Agents have converted them into new clients, some of whom have already written offers.  Overall we have seen an increase across the board. In Petaluma, sales and inventory have been steady. Open house attendance has been strong, with one property attracting 45 groups.  This was the third weekend in a row with multiple walk-ins at the office. New open escrows are on the increase, our Santa Rosa office reports, and open house activity continues to be unusually strong. Agents are seeing an increase in multiple offers. In Sebastopol, cash is king. Almost all multiple offers that agents write are lost to a cash buyer. Agents are struggling with the lack of inventory and the plethora of buyers. Lots of activity around the office. Conference rooms are filling up and most agents remain enthusiastic.

San Francisco – Spring has sprung at last, our San Francisco Lakeside office says.  Buyers seem to have lost patience with their search and want to move ahead with plans. So they’re not just making offers, they are actually buying and closing as quickly as loans can be produced. The Lombard office also reports increased activity, although some buyers still are lacking a sense of urgency. The new upcoming tighter loan criteria could move them off the fence. Similarly, the Market Street office says that while open house activity has been brisk all over town, agents are finding that buyers have once again become apprehensive about pulling the trigger and writing offers. The Sunset office reports increased activity, but there continues to be a shortage of inventory. Finally, the Van Ness office says both inventory and sales activity are increasing with an excellent Previews high-end market.

SF Peninsula — Sales activity is increasing in Burlingame with 25 ratified offers in the past couple of weeks. There are cash buyers at every price point. The sweet spot right now in Hillsborough seems to be just under $3 million with several attractive properties to choose from. There is quite a bit of new inventory just hitting the market or in the pipeline for spring in the $6-10 million range as well. The Previews market has improved, our Burlingame North office says. But buyers are still cautious. Only well-priced, well-staged homes in the best locations are selling for premium prices. Across the hill in Half Moon Bay, the market has been steady. A couple Previews high-end properties are pending that have been on the market for over nine months. Our Menlo Park offices report that sales activity has been increasing. Of the 18 sales, six were over $2 million. We are finally seeing some real strength in the $2 million-plus range.  Prices here and in Palo Alto have been creeping up in the last couple of weeks. Our local manager says that some buyers may be feeling that they should buy now before Facebook, Twitter, LinkedIn, Zunga, etc. go public and create a mini boom in the area. Our RWC/San Carlos office reports that open houses have been extremely busy for the first time opens, especially in San Carlos.   Offers are coming in quickly on properties that are well located, show well and are priced right. There seems to be a positive air to the market. The Palo Alto market is very strong up to approximately $4 million, our local office says.  The activity at open houses is in excess of three dozen or more groups at each open house – at all price points.  However, they are still short on inventory.  About a week ago, they had 12 sales – nine of which were multiple offers – in a 36-hour period! The San Mateo market has been strong as well in recent week with open houses very well attended. Finally, sales activity is on the rise in Woodside with 14 ratified offers in the past couple of weeks, four of which were multiple offers.

East Bay – Both inventory and sales activity have been steady in Berkeley. Open houses have been busy with 45-70 visitors per property.  We are receiving more REO properties in the past several weeks and short sale listings at higher price points. In Castro Valley, agents are finding that it is becoming much more difficult for their buyers to acquire good loans.  Lenders are becoming stricter and are often requiring additional backup documentation from potential borrowers. In addition, mortgage rates are creeping up and zero point loans are becoming very hard to find. Nonetheless, agents report a pickup in activity and are cautiously optimistic that this is indicative of an improvement in the overall market. Current inventory is still low in the Tri-City area, our Fremont office reports.  There are multiple offers in all price ranges for single-family homes.  The condo/townhouse market is struggling.  Open houses are very busy with buyers. Our Livermore office reports that the Previews market has been strong so far this year. Previews inventory in Livermore remains low with 12 active listings and approximately 2+ Previews sales per month.  Just a little over two years ago, the Previews inventory was 55 active listings in Livermore with less than 2 Previews sales per month.  The Oakland-Piedmont office says that the last two weeks of the month were very busy with agents reporting that there are lots of new buyers coming to open houses. There has also been an increase in referrals being placed agent to agent in our Northern California system. Finally in Orinda, the sales activity has been steady with 10 ratified offers, three of which were multiple offers.

Silicon Valley – In Los Gatos, both inventory and sales activity are on the rise. The under $2 million segment of the market continues to be strong. There are a lot of buyers looking for inventory. The San Jose Almaden office reports brisk sales activity up to the mid level ranges.  The low end is very hot.  Open house traffic is phenomenal in Almaden Valley with some homes experiencing 30-50 groups a day. Similarly, the San Jose Main office says that buyer activity seems to be increasing. Listing inventory is low, which leads to multiple offers on competitively listed properties. And the Willow Glen office reports that activity is a bit slower than usual, although open houses have been well attended.

South County – The first two months of the new year are bringing much appreciated activity to the South County market.  Morgan Hill agents are busy with well-attended open houses, and buyer interest seems high and genuine.  Again, well-priced homes are garnering offers (in some cases multiple offers).  Though prices are down, the rules of supply and demand will soon become a factor—as the listing inventory remains low and demand is on the rise.   Cautious optimism seems to be the mood in the Morgan Hill office as agents are working hard on every aspect of the market – short sales, REO’s and regular sales.

Santa Cruz – Sales in the county are slow. In January there were 94 closed single-family home sales – the same as Jan. 2009. The median price is down 12% over January of 2010 at $430,000. Final Feb. numbers are not out, but it’s expected to be about the same. Short sales and REO’s continue to impact prices in all market segments – the high end is not excluded from this.  This week we received a CB listing in one of the more exclusive areas of South County, where the homes are all over a million.   The good news is that there seems to be a quicker turn around lately by banks on short sales.  Recently an agent received a short sale approval in two weeks. Our REO agent said she is receiving on average two new listings per week, which has not been the case for the past 18 months or so.   This is a good change.

Monterey Peninsula – Sales have been very active in recent weeks with multiple offers very common – at least a dozen lately. In all, there have been 34 ratified offers. In the Previews high-end market, things are looking up, although there are still far more homes available than buyers right now.

That’s it for now. Have a good week!

Rick

 

 

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