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Berkshire Hathaway's home builder investments

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2023-08-18

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The recent purchases of shares by Berkshire Hathaway in three US home builders have stirred interest, though they lack the opportunistic flair of previous endeavors such as venturing into the oil and gas sector with Chevron and Occidental last year, or securing a stake in a tech giant, as was the case years ago with Apple.

However, amidst concerns of interest rate hikes and uncertainties about the US economy's strength, the effectiveness of Berkshire's investment strategy comes into question.

Data released on Thursday revealed that the 30-year fixed-rate mortgage averaged 7.09% this week, up from 6.96% the previous week, and significantly higher compared to the rate of 5.13% observed a year ago. This week's average represents the highest level since April 2002, when it reached 7.13%.

Given this interest rate surge, could the recent uptick in house starts be merely a temporary blip?

While the acquisitions of Lennar, DR Horton, and NVR by Berkshire Hathaway are intriguing, they might not have been orchestrated by Warren Buffett himself, who typically oversees deals valued at over $1 billion, according to various reports. This differs from the high-profile moves into Chevron and Occidental seen last year.

Looking at the collective value of these purchases in comparison to the market value of the trio of companies, it's evident that these are relatively modest investment endeavors.

The combined value of the acquisitions amounted to $814 million, which is relatively modest when considering the collective market value of the three firms—just slightly above $101 billion.

For instance, the acquisition of $726.5 million worth of DR Horton shares might appear substantial, but given the company's market value of over $41 billion, the stake held is less than 2%. Similarly, the next notable move was $70.6 million worth of shares in NVR, which holds a market value of $20.1 billion, again equating to a stake of less than 2%. Lastly, the acquisition of $17.2 million worth of Lennar shares is relatively minor given Lennar's market cap of $39.5 billion.

To provide context, Berkshire Hathaway's June quarterly report discloses that during the three months leading up to June, the company invested over $13 billion in US treasury securities, thereby increasing its total holdings of Treasuries from $106.9 billion to $120.4 billion.

Buffett's current stance towards equities is also noteworthy. The company's June quarterly report reveals that in the first half of the year, Berkshire Hathaway allocated just $7.4 billion towards buying equities, while divesting shares valued at $25.8 billion.

Against the backdrop of these figures and the significant investment in US Treasuries during the same period, the investment of just over $800 million in shares across three home builders (equating to around 0.7% of their combined $101 billion market value) is intriguing, but not a monumental deal.

Predictably, news of Berkshire Hathaway's purchases had an initial impact on the share prices of these three companies—DR Horton shares gained 2.9% on Tuesday, while Lennar and NVR saw more modest increases of 1.8% and 0.5%, respectively.

However, by Friday, these gains were reversed, and share prices dipped further. This occurred despite data indicating a 3.9% month-over-month rise in US housing starts, reaching an annualised rate of 1.452 million in July 2023.

The uncertainty surrounding the US Federal Reserve's potential interest rate hike in the coming month, driven by faster-than-expected economic growth (estimated at 5.8% by the Atlanta Fed and 4.8% by Moody's), could threaten the nascent recovery in home building. This uncertainty is reflected in the drop of 2.5% for DR Horton shares on Thursday, nearly 5% for Lennar, and a 2% decrease for NVR shares.

Could this scenario mirror Buffett's 2019 misstep when he purchased significant stakes in major US airlines, only to be compelled to sell off these holdings at substantial losses due to the pandemic's adverse effects on the travel industry? In 2016, Berkshire invested $4 billion in airline stocks. By December 2020, the values of American, Delta, Southwest, and United shares were down by 62.9%, 58.7%, 45.8%, and 69.7%, respectively, leading Buffett to confirm the sale of all shares at the company's annual meeting in May 2021.

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