Warren Buffett’s Betting On Homebuilders

| July 11, 2011 | 0 Comments

There’s really no question – Warren Buffett’s one of the greatest investors that’s ever walked the earth.

But when I heard about his $1 bet with economist Peter Orszag, I thought the Oracle of Omaha might be losing it.

You see, in a CNBC interview, Buffett said he’s betting unemployment will be well below 8% by the time the next presidential election gets here.  And that’s just 16 months away!

That’s a bold prediction…

Consider this, just last week we found out the US unemployment rate went up from 9.1% in May to 9.2% in June.  And it would have been 9.3% if 272,000 people hadn’t left the workforce!

Last week’s jobs report was so bad many economists called it an “unmitigated disaster”.

Clearly, it’s not looking too good for Buffett.  According to the latest estimates, the US economy needs to add a staggering 217,000 jobs per month in order for him to win his $1 bet.

Right now, Buffett will admit he’s a big underdog to win the bet.  But he’s not giving in.  In fact, he thinks one industry’s revival could tip the scales in his favor.

What industry is the Oracle banking on to win his bet?  Housing!

That’s right… Mr. Buffett expects the hardest hit area of the economy to come roaring back in the next 18 months.  He believes “people vastly underestimate the amount of unemployment…attached to…construction.”  And once the pace of new construction picks up steam, it will fuel a massive hiring binge.

Buffett’s reasoning is simple.

The US population is growing and new households are forming at a faster rate than houses are being built.  And we simply can’t have too many years with 500,000 new homes built before we have a housing shortage.

But 500,000 new homes per year is all the US has averaged since 2009. That means for the last two and a half years we’ve been building fewer houses than we need to keep a roof over every head.

Eventually, the pace of construction needs to accelerate to keep pace with population growth.

And as crazy as it sounds… he might just be right.

Over the last few years, we’ve worked through a massive oversupply of housing.  And now we’re beginning to see the first indications of a revival in construction.

It all boils down to this… affordability.  In other words, is it cheaper to rent or own?

Remember, rents are rising.  Home prices are falling.  And interest rates are near record lows.  So, the pendulum is swinging back in favor of owning.

The bottom line is the US will be facing a housing shortage if the pace of construction doesn’t pick up soon.  And when builders go back to work, it will fuel a surge in jobs and economic growth.

If you want to jump on board with Buffett, I’ve got an easy way for you to buy in.  Take a look at the SPDR S&P Homebuilders ETF (XHB).  It holds 37 stocks that go like gangbusters when the pace of construction picks up steam.

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Category: Real Estate

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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