Three Reasons Buffett’s Recovery is Wrong for Real Estate Investors

Warren Buffett is famous for his often uncanny ability to analyze companies and invest where there’s money to be made. During the tech boom of the 1990’s he was ridiculed for staying out of wild west startups coming out of California. Many of the people who threw out their criticisms ended up broke.

Earlier this week, the media publicized reports that Mr. Buffet is betting big on a Real Estate recovery. He may be right, but I don’t think so.

All Real Estate is Local

Reviewing the national numbers as a whole may shed light on the overall housing economy. However, it does little to give local insight to investors sinking their money into bricks and mortar.

I once owned a 3 story building in a very bad neighborhood. I used the house for an office and made sure to leave before dark. I bought it because it was cheap and fit my needs. Ten blocks from that house was one of the nicest neighborhoods in the city.

Ten blocks was the difference between a $10,000 property and a $700,000 property.

The national inventory of new homes for sale is the lowest in 5 decades. If your investment portfolio is diversified across the country, you’re in great shape. But if you focus your Real Estate pursuits close to home, it doesn’t really matter what’s happening across the country (or across town).

The only thing that matters is what is happening with your properties.

Ghost Inventory

Three months ago I spoke to an REO broker I’ve done business with. He picked up my call as he concluded the walk-through of a new listing one of his bank asset managers sent him. The house he looked at was foreclosed on in 2009. Until that day, the property was one of the millions of houses that I call “ghost inventory.”

Based on the number of homes on the market and the estimated number of buyers, there is about 6 months of inventory. That 6 month inventory number is important. It’s the threshold where a buyer’s market becomes a seller’s market. If the numbers are true, it’s a big deal.

But I contend that the reported numbers don’t reflect the facts.

There are countless (because there really is no way to predict the number) properties that were repossessed by banks in foreclosure proceedings that remain unlisted. The banks know that a glut of inventory kills prices. So they hold off on introducing properties to market until there’s a recovery. It’s a smart practice for the banks, but it skews the real statistics.

Until the market reflects the real number of homes available, we will not have a true recovery.

It’s the Economy, Stupid!

If you haven’t noticed, the economy isn’t so great. Jobs are scarce and the future is uncertain.

Until our economy recovers I don’t see a true recovery in the housing market. That may put the cart before the horse because the two go hand-in-hand. I just find it difficult to believe that people will rush out and buy a house when they’re uncertain on the future of their employment.

People will always need places to live. It’s true. But until they are comfortable with their job, I think it’s unlikely they search for that place to call home.

Have We Hit Bottom Yet?

I may come off as a bit of a skeptic on Real Estate investing. I am certainly not. It’s a great investment vehicle and now is one of the very best times to buy. I just think Warren Buffett’s prediction of a Real Estate recovery is premature.

The future is uncertain. Uncertain times lead some to infamy, like the Greatest Generation going into World War II. More often, uncertainty leaves others crushed into the dust of history.

Home prices seem to have regularized and I don’t think we’ll see another large drop in values. I’ve been wrong before.

I may well be wrong on my assessment in this article. Mr. Buffett may be spot on. But unlike those that bet against him in the late 90’s tech boom, I see the risks as well as the rewards.