It's official... Warren Buffett isbullish on real-estate.
Last March, in his annual address to shareholders, Buffett
advised affluent investors to invest big in residentialreal estate
. In fact, he went on record saying it would be wise toload up on
"a couple hundred thousand" single-family homes.
His logic was incontrovertible. According to Buffett, more than
600,000 new family households are being created each year. Yet, new
home construction had dipped below 500,000 annually. That means
buyers are sopping up the excessinventory from prior years.
Those supply and demand dynamics can't last forever... And as
soon as the excess is whittled down, new home construction will
need to rise just to accommodate the number of new families being
created, Buffett reasoned.
In other words, it was only a matter of time before homebuilders
began sawing and hammering again.
And he is putting his money where his mouth is...
Buffett's Berkshire-Hathaway (NYSE:
recently won a bid to buy bankrupt real estate finance company
Residential capital, or ResCap, for about $1.5 billion.
Buffett's thinking wasspot on... First, there were a few "green
shoots" that indicated signs of life. But over the past six months,
we've been presented with convincing evidence that the
housingmarket is in full recovery mode.
Construction of single-family homes is now running at an annual
rate of 535,000, the busiest pace since April 2010. Overallhousing
starts (including apartments) have risen to 750,000, up from
571,000 in August 2011.
Building permits, a reliable indicator of future construction,
stand at 803,000, near a four-year high.
New home sales have climbed to an annual pace of 373,000, a
powerful 28% increase from the same month last year. Median new
home prices jumped 11.2% from July to hit $257,000. That's the
sharpest one-month increase on record and the highest level in five
There is currently just a 4.5-month supply of new homes on the
market, the thinnest inventory on record.
This is what a sustained recovery looks like. In 2011, housing
starts spiked above 700,000 just one time (in November).
But they've held above 700,000 every single month thus far
Of course, buying into this rally can be tough if you're aretail
investor . Most of us lack the idle cash to buy up entire
neighborhoods or invest in new developments.
But there is still one investment that allows investors like you
and me to play the housing rebound... and I think it has a lot more
I'm talking about trees, or timber to be exact.
During the past ten to twelve months, homebuilders have been
reporting a surge in buying traffic and new orders. And that is
translating into healthier bottom lines.
The chart shows that there is a powerful rally underway in the
homebuilding sector. However, timber companies -- as represented by
iShares S&P Global Timber & Forestry Idx (Nasdaq:
-- have been slower to respond.
This disconnect can't last forever... After all, you can't build
a new home without stacks of lumber and sheets of plywood. So with
construction activity heating up, forest products companies can't
be too far behind.
One of my favorites in this group --
-- has already bounced to $26 from $20 per share since the summer.
But I think it's on track to rise to $40 and beyond.
Weyerhaeuser is sitting on two million acres of prime timber
land in Oregon and Washington -- the timber industries sweet spot.
The cool, damp climate and fertile terrain are perfect for the
high-value Douglas fir.
Additionally, the trees in this region not only feed the U.S.
housing market, but are also shipped to China, which has outgrown
its own domestic timber supply.
But timberland is just one area of Weyerhaeuser's business. The
company also owns several real estate subsidiaries engaged in the
sale of residential lots and custom-built homes. In fact,
Weyerhaeuser is among the nation's top-20 homebuilders under brands
such as Trendmaker and Winchester.
Weyerhaeuser's homebuilding segment (which enjoys some of the
highest margins in the industry) is reporting an 80% surge in
traffic since the fourth quarter of last year. And those customers
aren't just window shopping -- the company closed on 764 new homes
last quarter at an average price of $396,000 per home.
As areal estate investment trust (REIT) , the company aims to
distribute at least 75% of its pre-debtcash flow . Shareholders can
currently look forward to $0.60 per share in annual dividends, for
a respectableyield of 2.3%.
That's more than triple what you'd get from a 5-yearTreasury
bond -- but I'm not buying WY for its yield. I expect the stock to
handily outrun the market as U.S. housing wakes from its slumber
and construction picks up.
In the meantime, demand from overseas remains brisk -- the
company exported $370 million in logs last year to Japan, China and
Risks to Consider:
Of course with investing, nothing is 100% certain. With three
of its four divisions linked to the housing market, Weyerhaeuser
could suffer if this proves to be a false recovery and construction
Action to Take -->
But if you're looking for an easy to way to follow Warren Buffett's
lead... then I suggest a timber company like Weyerhaeuser. If
Buffett continues to be right about the housing market, then this
will be a stock you'll want to own.
-- Nathan Slaughter
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Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of WY in one or more of its "real money" portfolios.
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