Billionaire investor, Warren Buffett recently sold his beach home in California for 32% less than original asking price. Is the Oracle of Omaha trying to tell us something about the real estate market?
Let's look at some key indicators of the national home market.
Mortgage rates are creeping up (just under 5%) but still historically very low. What does this mean? Borrowers are still able to borrow money on the cheap. To put it into perspective: If an individual finances a $300,000 home, putting a 10% down payment, he or she would pay approximately $170 a month less if borrowing money at 5% verses 6% interest rate. That savings gives the buyer the ability to either save the money, purchase a bigger home or spend it on something else. The latter 2 can only help the economy.
An interesting phenomenon has also been occurring in the past few years. There has been some changes in how credit scores are calculated, giving a boost to individuals who pay their utilities on time and even to individuals who have had previous medical debts, civil judgements and tax liens. This, on the surface, appears great as the credit score changes will allow individuals who were once on the cusp of being credit worthy to lenders now being given a loan, albeit at a high rate. My concern is that these borrowers still have very low scores and are still at a higher risk of default. Giving them a credit boost appears to be a short term help to the economy, but what happens when inevitably a certain percentage of these folks start to default on their loan?
To make things more complex, the economy's GDP is strong and unemployment is at an all time low. And the housing market is still being buoyed by low inventory, especially on the more affordable properties below $400,000.
There are a lot of mixed signals here.
My opinion is that the housing market is being held up right now by one thing: inventory. Once inventory increases, home sales and pricing will decrease and defaults will increase. This can really have a domino effect on the global market, as we have seen in the housing crash at the end of 2007. I am not saying we are bound to repeat history in the foreseeable future with a drastic downturn, however, do not be surprised if there is a bit of a pullback in the housing market in the next 1-2 years. It is with hope that the inevitable shift is a slow moving one, which is something we can easily absorb.
Going back to Mr. Buffett. Surely he has the knack of knowing when to hold them and when to fold them when it comes to investing. He has famously coined the phrase "Be fearful when others are greedy and greedy when others are fearful" and is looked upon as one of the top tier investors of our generation. So was the sale of his California home an indication of him being fearful when others are greedy?
I believe it's coincidental. Buffett is 88 years old and has rarely visited his vacation home since his wife died in 2004. It may have been an asset that created too many problems for him as most vacant homes do for their owners.
Don't feel bad for him as he purchased the home in the early 1970s for $150,000. He has sold it 7,900,000, making a whopping 50 times what he paid!