Dave:
In just 11 trading days this fall, Warren Buffet’s company, Berkshire Hathaway, put roughly $600 million into one stock. Lennar, one of the two biggest home builders in America. And if you think about this, the timing is pretty wild because mortgage rates just hit their highest level in nearly three years. At the same time, builder confidence is the lowest since 2012. Cancellations on homes hit their highest point on record in September, and almost every analyst on Wall Street is telling you to stay away from home builders. So why then is the most famous value investor on the planet backing up the truck and investing in these stocks? Is Berkshire seeing a bottom that the rest of us are missing or is this a very expensive mistake? Today on On the Market, we’re breaking down exactly what Berkshire bought, the much bigger housing bet hiding behind the headlines, what the bulls and bears are saying, and what this means for you as an investor.
This is On the Market. Let’s get to it.
Hey everyone. Welcome to On the Market. I’m Dave Meyer, chief investment officer at BiggerPockets. And today on the show, we’re following the smart money or at least the big money. I guess we’ll decide if it’s smart money throughout this show. We’re talking about some interesting investments into the home building industry that kind of caught my attention because for months now on the show, we’ve been talking about a tough housing market. We got high rates, affordability, multi-decade lows, builders slashing prices. They’re getting hammered right now. And then right in the middle of all of that, Berkshire Hathaway, Warren Buffet’s company goes on a buying spree in home builders. And I just think that when one of the most famously patient, famously disciplined investors in the world starts to zig while everyone else is zagging, I want to understand why. And why this is happening does really matter because on a macro level, it tells us how sophisticated long-term investors are actually reading this housing cycle.
And on a personal level for our investors, it sort of raises the question every one of us is wrestling with right now. And to borrow Warren Buffett’s quote, “Is it a time to be fearful or is it a time to be greedy?” Let’s discuss it. Let’s get into it. First up, what did Berkshire Hathaway actually do? So back in September, between September 17th and October 2nd, they bought nearly $600 million of Lennar stock. If you’re not familiar with Lennar, they’re one of the two biggest home builders in the entire country. And Berkshire Hathaway, during this weird time that we’re in in the housing market, went out and bought 29 million shares, which is about 12% of a company, which is a lot for a publicly traded company. Taking a 12% stake in a home builder is pretty notable. It seems a little curious why a company like this, like Berkshire Hathaway, would be going out and buying Lennar during what is pretty famously and commonly known as a terrible time for home builders right now.
And I have been saying Warren Buffet, I just wanted to call out that there’s a new CEO, Greg Abel. Warren Buffet is still involved. He’s the chairman of Berkshire Hathaway. So we were talking about Warren Buffet’s company, but the person actually making the decision on this was probably Greg Abel. Anyway, regardless of who signed on the dotted line and made the decision, I think it matters because even if it’s not Warren Buffett, it’s still this Berkshire Hathaway philosophy. They’re value investors. They’re looking for stocks that are cheap relative to their long-term outlook, and they are investing famously in this. And to me, that’s worth looking at. And I think this headline has made a lot of news recently, but I think a lot of what the coverage is missing is that this $600 million investment that they made into Lennar isn’t even their biggest bet in housing.
They actually made an even bigger bet into housing over the summer. In July, they actually bought the entire company, Taylor Morrison. This is a company that was worth almost $7 billion. This company, Taylor Morrison, does about 13,000 home closings. That’s what they did last year. And they have a net income of almost $800 million, and it was the new CEO’s first major acquisition. So again, it may not be Warren Buffet, but of all of the industries that the new CEO of Berkshire Hathaway could be choosing to invest in, they’re picking housing, they’re picking home building, and that tells us something. Berkshire Hathaway also owns Clayton Property Groups, which is 15 regional builders that they have all rolled up together. They’ve done 23,000 closings last year. And if you actually look at this, Berkshire Hathaway, if you combine all of their assets and just think about the volume that they are doing, they’re actually the fourth largest home builder in the US behind D.R.
Horton, Lennar, and Pulte Group. That’s crazy, right? On top of that, it also includes a company called Yardley, which is a build to rent business. So Berkshire is also getting into the single family rental business as well. I could keep going on, but I don’t want to bore you, but I will just mention they also bet on a lot of things. They have Clayton Homes, that’s factory built manufacturer homes. They bought that way back in 2013. They have building products. They have Berkshire Hathaway Home Services, one of the largest broker franchises in the country. They have small stakes in other builders like D.R. Horton. So when you just look at it, Berkshire now touches almost every layer of a home transaction. The bricks, the carpet, the builder, the agent, this is not just like a single trade. I know that’s making the headlines right now.
It is a strategy that they have been working on for years. So what is going on here? What are they seeing that everyone else is not seeing? We’ll get to that right after this quick break. Stick with us.
Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about Berkshire Hathaway, one of the most famous value investing firms in the world, making a huge bet over a sustained period of time into the US housing industry, even though things aren’t looking great right now. And to understand the bet that they are making, you sort of have to understand the backdrop of what’s going on in the industry. And you probably know this, but the backdrop is pretty ugly. I’m not trying to fearmonger here. I’m just going to share with you what is going on in the home building industry and in the housing industry that makes the timing of these investments a little bit curious. Probably know this, but rates are one thing, right? Freddie Mac 30-year average as of today is about 7.4%. It’s the highest that it’s been since November of 2023.
It’s been fluctuating a little bit, but it’s up a lot year over year. And so just in the last year, home builders have been under more pressure than they were even a year ago. Combine that with builder sentiment index. This is something I always keep an eye on. It’s builder transactions, it’s a reasonably good recession indicator. And so one of the things that I like to look at is this National Association of Home Builders. They put out a confidence index. They basically ask builders how good they’re feeling about their industry. And right now, the answer is really not good. It is the lowest it’s been since June 2012. It’s an index, so 50 is kind of even. Anything under 50 is not good. We’re at a 29 right now. People are not feeling very good about building new homes right now. We look at buyer traffic, that index again out of a hundred is at 18.
It’s the lowest since April 2012, if you exclude the little blip during COVID when no one could go outside. I’ll keep going. Look at builders cutting home prices. 43% of builders cut prices in October, and that doesn’t even include incentives. Builders hate cutting home prices and 43% of them still do that. They did that even though that lowers their comps for future sales, 43% still did that. The average cut was 6%, that is notable. And 65% of builders are using incentives. So builders not looking great. And if you look at the sort of macro numbers, it backs up the same thing, just new home sales. It was 676,000 annualized back in September, which is 5% below a year ago and it was already low. That’s a pretty big drop year over year when you’re already starting low. Inventory is above eight months right now, so you’re definitely in a buyer’s market and pairing that with what’s going on in the existing home market, not even home builders.
We’re at an extreme low with transaction volume, cancellations and contracts are up. I don’t need to go on. You get it? It’s not great. And that is true of the industry in general, but it’s true of Lennar also. So if you look at Q3, the last quarter, some companies have weird quarters. They ended their quarter on August 31st. Their revenue is down 8.5%. Their gross margins were down. And if you look at the data, it was Lennar’s weakest quarter since 2009. Not great. And actually, sorry, I’m dumping stats on you guys, but I have one more with you because this one kind of stood out to me when I was doing research for this show. But according to their own CEO, Lennar’s CEO, Stuart Miller, he said that 50% of people who come to our Lennar home cannot immediately qualify for a mortgage. So that’s just garbage visitors.
I don’t mean that about the individuals, but for them as a business, that’s basically useless. These people can’t qualify for the homes they’re coming to go look at. And so they’re getting less traffic, right? Remember, the index was 18 out of 100 and the traffic that they’re getting is not even qualified to buy these homes. So it’s just not good, so much so that their stock is now down 26% year to date just since January and 40% over the last year. So again, I’ll ask the question, why is Berkshire buying the largest volume builder in the country in what the data shows is the weakest new home market in over a decade? Here’s the bull case. Why invest in these markets? Well, Berkshire hasn’t gone out and explained why they bought all the stock in Lennar, but Greg Abel has talked about housing broadly and the logic, I think, isn’t really hard to piece together.
So here’s how I see it. First and foremost, they’re explicitly not betting on a quick recovery. Actually, if you look at what Greg Abel said on CNBC on September 2nd, right before the buying spree, he said, “We don’t envision a quick recovery there, but we do see it as an industry that we definitely want to be invested in and we’re invested for the long term.” And on the Taylor Morrison acquisition, they’re taking a very long-term view that the American dream will still continue to exist, even though all the skepticism about that right now and that five or 10 years from now, it’s going to be a really strong asset. So the main thing to take away here is that Berkshire isn’t calling a bottom. They’re not saying this is going to turn around tomorrow. They’re saying, “We don’t actually really care when the bottom is because we’re betting on this for five, 10, 15, 20 years down the line.” And that is classic Berkshire Hathaway approach.
They’re not get rich quick firm. They just don’t operate that way. They buy value. And so when they see Lennar at 40% off what it used to be worth in an industry that they believe will come back, that’s the first reason they’re making this bet. The second reason is that the structural shortage that we talk about hasn’t really gone away. Realtor.com estimates that the US entered 2026 still short more than four million homes. New construction in 2015 didn’t even keep up with household formation, so we probably fell behind again. And although there is weak demand today, the weak demand is really an affordability problem. It’s not a nobody wants a house problem. There’s something I talk about all the time. People ask me this question. Demand, quote unquote demand in economics doesn’t mean how many people want something. It’s how many people want something at a specific price.
And so there is less demand right now because the prices are too high. That does not mean people do not want to buy homes. And so in the future when cycles shift as they do, if homes become more affordable, Berkshire is probably betting on a lot of demand because we have this structural shortage that frankly we haven’t made any progress on. And so it is likely that building is going to be needed in the future to solve that shortage. And again, we’ve talked about on the show that shortage, people debate it, but if they believe that shortage is real, this bet does make sense. The third reason is just classic Warren Buffet. He has coined that famous saying to be greedy when others are fearful and fearful when others are greedy. People are certainly fearful about the home buying industry right now. When you look at builder sentiment at a 14-year low, almost every stock analyst is saying sell on Lennar.
It’s not a good stock. Well, this is what Warren Buffet’s always been doing and been doing it very predictably. The last time builder sentiment, just as an example, the last time builder sentiment was this low was 2012. People probably though you were crazy to buy home buy other stock, but you were pretty happy if you bought in 2012, right? Now it took a while for them to recover, but you probably did very well on this investment and maybe that’s how Berkshire Halfway is seeing it. And then fourth is just details about Lennar itself. Lennar is pretty stable. Even though their stock price is down, they’re cutting forecasts, all that kind of stuff. They only own about 2% of their home sites and they have this model where they’re not taking on as much risk as a lot of other builders. They have modest amounts of debt.
They’re able to build faster than they ever were before with only 116 days and they have margin to give up. They can lower prices and still earn a profit. And they are actually, their CEO said they’re deliberately compromising margin in order to maintain volume. Basically, they’re trying to use their size to keep selling things right now while smaller builders can’t afford those incentives. And so it seems that Berkshire is saying, okay, home builder’s not great, but this industry might consolidate and there’s going to be winners and losers. A lot of them are going to go under. They’re trying to pick a winner and Lennar might be a winner even though it’s a bad time. It’s not going to be their best month ever, but can they emerge from this bad time stronger? Maybe so. And then the fifth reason I just kind of mentioned it was consolidation.
High rates, these kinds of environments, they hurt small builders most. These small builders don’t have the same ability to buy down rates or they have more debt and they just get in a harder situation. And so maybe Lennar goes out and buys some of these companies or just waits for them to fail and then picks up some of their market share. So that is another bull case, right? That’s another reason this could go well. But there are ways this could go wrong. Absolutely. So let’s talk about the bear case. What could actually go wrong here? And I should call out that yeah, they could be wrong because Buffett, super famous, maybe the most famous investor in the world, but he’s been pretty wrong on housing before. Actually in 2009, he wrote a letter to investors saying that his housing problems in the US economy should be largely behind us in a year or so.
That was in 2009. He was not correct about that. It took at least till 2013 until the market bottomed. And for home builders, it was quite a while after that until they really regained their footing. And Buffet admitted this. Two years later in 2011, he wrote another letter that said he was “dead wrong,” so he was honest about that, but said even though he was wrong, that housing will come back, you can be sure of that. And he was right about that. It was just a couple of years later than he thought. So good lesson here. Even the best investors, they can be right, let’s say, on direction about where they think things are heading, but timing always very difficult. But Berkshire, lucky for them, they can afford to be early. Not all of us can, but they’re big enough. They can be patient, they can wait, they can afford to be early, and they’ve earned that.
And to me, that’s kind of the biggest risk is that they’re early because I do think home building will come back. It’s just how long are you willing to sit on the opportunity cost of owning that stock before it recovers? For you and me, that might not make sense, but for Berkshire, it’s really a question of opportunity cost. The other risks are if rates stay higher for longer, again, it just hurts their opportunity costs and it could put a lot of pressure on them to lower their margins further. And it’s the stuff we talk about all the time. There is no clear path back to affordability in the housing market right now. It’s going to take a while. And so there might be pain for Berkshire before this recovers, but generally speaking, I’ll just give you my take. I think this makes sense. If you have the capital to go out and buy 40% off of their stock for one of the biggest home builders in America right now, it kind of makes sense to me if you’re not trying to get rich overnight.
Even the risks that I said, it doesn’t really break the thesis that they’re probably operating on, all the stuff I shared with you before. If their time horizon on this investment is five to 10 years, kind of makes sense. Next year, two years, three years, who knows? But long-term, it makes sense. That sort of brings us to the question, what does this mean for you as an investor? We’re talking about one of the biggest companies in the world. Does this relate to you as an investor and what you should be doing? And I would say yes, and I will share with you exactly what I think right after this quick break. Stick with us.
Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about why Berkshire Hathaway is making a huge bet on home building, and let’s turn our attention to what this means for you. I’m not here to say go out and buy Lennar. I have a considerable stock portfolio, but I do not pick a lot of individual stocks. I do some for fun, but I am not an expert on Lennar stock, so I’m not telling you to go out and buy that. But what I do think is really interesting and something that we can all learn from here is that to borrow the thesis that they’re using, not necessarily the trade, because it’s the way that Berkshire is thinking about this that I think is really applicable to real estate investors right now. They’re saying, “Yeah, there is short-term pain in the home building industry, but there are long-term structural reasons to think that this is going to come back.
And if you are willing to buy while sentiment is in absolute gutter, you could absolutely benefit from that.” And this sentiment, this thesis to me, at least personally, when I was researching this and reading about it, doesn’t just apply to home building, it also goes to rental properties. We talk about this all the time. Is right now a buying opportunity? I would say yes. Everyone is fearful right now. Prices are going down. Is it going to recover next year? We don’t know. Probably not in my opinion. I think we’re at least two or three years out. It could be five or six years. But think about how Berkshire Hathaway, one of the most successful investing firms in the world is thinking about this. You’re going to buy at better prices than you’ve been able to in quite a while, and if it’s going to recover, which I believe housing will eventually, then why wouldn’t you be buying right now?
There’s still going to be a shortage. There’s still going to be a demand for rental housing. You have to be careful and buy good assets. But I think the way they’re thinking about this is a model for buy and hold real estate investors right now. The second thing to remember about this is even though we should have a similar thesis to them, their business model is different than all of ours because they have more money than they know what to do with. I think Berkshire has hundreds of billions of dollars in cash just sitting there. So if their stock, if Lennar stock goes down, it’s a drop in the bucket for them. It doesn’t really matter. They’re in this for the long run. But for you and I, if you go out and buy a property right now, you don’t need it to be a home run next year, but you do need to stay in the game.
They’ve got that covered, but for us, we need to assume a slow recovery. I hope that’s not the case, but you have to assume no appreciation, no rent growth, don’t count on a refi, get fixed rate debt, all the stuff we talk about. You need two or three years minimum, in my opinion, of cushion on that. That’s sort of the key right now to the strategy that Berkshire’s using and we should be learning from, buy when things are really low and hold on for the long term. You have to have staying power. You have to be able to stay in the game and you do that through conservative underwriting. That’s number two. The third thing to remember, and I’ve been saying this for a year at least now, but man, new constructions, there is good deals out there. 43% of builders cutting prices, 65% using incentives, Lennar giving up 12% of purchase price and incentives, right?
These are significant savings on newly built homes. Builders need volume. They have to sell. They’re the most motivated sellers in the whole market right now. So ask about rate buydowns, closing costs, ask about price reductions, even though they’re loath to do that. They probably will still do that in certain areas. And for buy and hold investors, getting a newly constructed home below market value with concessions and low CapEx and maintenance costs for a while, pretty good. My one knock on new construction just generally is a lot of times it’s just in the middle of nowhere and I don’t like buying in the middle of nowhere. I like buying near cities where jobs are. So keep that in mind, but there are plenty of good newly construction homes in good areas, but just make sure you’re still buying in a good area. Don’t just buy new construction because it’s new and you’re getting a good deal.
You have to make sure there’s demand for rentals and there’s going to be a resale demand for that as well. The fourth thing I want to call out is just when you look at Lennar and why of all the home builders, Berkshire chose to invest in them. I don’t know, they haven’t said this publicly, but just when I’ve been doing my research on this, I would say that Lennar has a strong balance sheet. If you look at them as a business, they have generally low debt. They don’t have a lot of debt. And I say this all the time, but why do companies fail? Why do bubbles collapse? Why do we go into a session? It’s almost always debt. It is always because we borrow too much and then eventually you can’t service that debt and something breaks. That happens on a macro level, but it happens with individual companies as well.
And if you look at Lennar, they’re pretty well poised to get through this cycle because they have low debt and they have a lot of liquidity. They have a lot of cash on hand. And I think that’s a really important lesson for us to think about here because this is the same thing for smaller, medium-sized real estate investors. The people who come out of this cycle stronger are the ones who don’t get forced to sell, who have strong balance sheets. And so if that means paying off debt, selling properties that have bad debt, raising cash, raising liquidity, that’s what I’ve been doing. I’m sitting on a lot of cash relative to my net worth right now. One, because I want to protect myself, but two, because I want to find opportunities as they come around for the next couple of years. I’ve sold rentals that are good properties because I want cash to buy even better deals in the next couple of years, and I’m going to do that with low debt.
So think about your own personal balance sheet in that way. How do you position yourself to not just get through this time, but to benefit from it, to take advantage of the pricing and negotiating leverage that you’re going to have for the next couple of years? So overall, just to recap, Berkshire Hathaway making a big bet on housing because they’re long-term investors, and I would hope to think most people who listen to this show are the same way. And so just think about how they’re thinking about this. To me, I found this whole exercise of researching and learning about this pretty encouraging because this is kind of how we talk about on this show thinking about real estate investing. Yeah, it’s a rough market right now, but you can find good opportunities. And if you’re in it for the long run, you’re probably going to do pretty well.
If you can be greedy when others are fearful to see through the fear, the hype and all the doom and gloom in the media, underwrite conservatively, maintain a good balance sheet, you’re going to be able to find good deals. And I think you’ll look back on this time and say, “Man, it was good to be active in that market.” That traditionally happens. That’s why that famous quote from Warren Buffet exists, right? People are always piling into an asset once it’s already hit its peak, right? This happens all the time. And then once it crashes, they don’t buy anymore because they’re like, “It’s over.” But we all know these things work in cycles. Eventually it’s a year from now or two years from now, four years from now, we don’t know, but it will come back. And if you bought at good discounts, that will pay off for you.
It really will. And I think that’s the most important part. It’s not saying that the housing market’s going to turn around next week. It’s not. What I am saying and what I think Berkshire Hathaway is doing here is betting on the long-term prospects of the housing market. And historically speaking, you’ve never really gone wrong doing that. I just want to remind everyone of that fact. Yes, stay in it, get good deals, but the long-term bet on housing still does make sense to me, and it certainly makes sense to Berkshire Hathaway. That’s our show for today. Thank you so much for watching this episode of On the Market. I’m Dave Meyer, and I’ll see you next time.