Buffett: The Future Will Be Like The Past, Only More So

Warren BuffettBy USA White House [Public domain], via Wikimedia Commons

Buffett: The Future Will Be Like The Past, Only More So by David Merkel, CFA of The Aleph Blog

Yesterday there was an article where Buffett was quoted on getting mortgages to buy houses. Let me quote the most relevant portion:

“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel,California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”

Now, when I read the comment stream on the article, I was not surprised at the level of disagreement, but the vitriolic nature of the the disagreement.  Buffett is certainly not made of Teflon anymore, and fame has led to its share of detractors.

Now, I don’t think that Buffett is giving the right advice to everyone here, but I also don’t think that he is talking his book because has has investments in firms that sell:

  • Real estate
  • Manufactured housing
  • Building materials
  • Mortgages
  • Etc.

Indeed, Buffett has enough investments that almost anything he says could be talking his book.  I think his character is such that he does not talk his book — his firm is one that is built on “low hype” attitudes, at least, low hype for a company of its size and complexity.

Should everyone run out and get a mortgage because it is a cheap time to be borrowing money?  That is an individual question, hinging on how secure and high your income is versus the likely payment on the mortgage, and other housing-related expenses.

The interest rate may indeed be low relative to history, but how well will the economy do in the future?  Maybe residential housing is too expensive in some areas to get a lot of people excited about buying.

Buffett also said:

“Household formation falls off dramatically in a recession, at least initially,” he said. “But that doesn’t last long. Hormones kick in and in-laws get tiresome, too.”

Unless something changes in US culture, there have been changes to the demand for homes, driven by the following factors:

  • People are marrying later and less frequently
  • They are having fewer kids
  • Urban areas are more attractive for many people to live in, reducing commute time and costs.  Even car-buying is affected.
  • There are fewer move-up buyers because of the financial crisis.
  • The ability of lower middle class people to afford homes has been reduced, particularly in high cost of living areas.
  • The financial crisis has ruined the illusion that residential real estate is an investment that can’t lose money.

There may be more reasons, but even though the 30-year mortgage is the cheapest long-term financing that an average person can get, there are more people than before who are not interested in buying a home.  Renting suits their goals fine.

As such, I think Buffett is wrong here, and that borrowing to buy residential housing will not be as prominent as it was in the past.  But I don’t think he has any bad intentions in what he said — he believes in America, and thinks that we will return to the consumption patterns of the past, which relied on too much debt in my opinion.

Final note: I’m getting tired of reading comment streams.  The people there are often too cynical, and too loose with the truth.  Their expectations for what they deserve in this life are also inflated beyond what is reasonable.  Some turn to conspiracy theories to keep themselves from blaming their bad fortune on their own actions.

Buffett is generally a good guy, and a good example as far as businessmen go — he does not deserve the abuse.  I don’t agree with Buffett’s politics, but I don’t think that he is not sincere.

Full disclosure: long Berkshire Hathaway Inc. (NYSE:BRK.B) and Wells Fargo & Co (NYSE:WFC)

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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