Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Berkshire Hathaway Is Betting on Housing Again
Transcript
- Lucas: So Berkshire Hathaway just made a roughly six billion dollar bet on housing, and I want to talk about why that matters right now. Luna: Six billion — that's not a small allocation, even for Berkshire. What exactly did they do? Lucas: It's not one bet, it's a cluster. Over the past few months, Berkshire built a significant stake in D.R. Horton, the largest homebuilder in the U.S. by volume. They also expanded their partnership with Clayton Homes, the manufactured housing giant Berkshire already owns outright, and they added to positions in building materials suppliers like Owens Corning. Luna: So they're going long on the entire residential construction chain. That's pretty directional. Lucas: Exactly. And the timing is interesting. The S&P 500 is at 7,557, near its all-time high. The Dow just crossed 50,800. But housing stocks have actually been underperforming the broad market this year. D.R. Horton is down about 4 percent year-to-date, and the homebuilder ETF, ticker I-T-B, is flat. So Berkshire is buying into relative weakness. Luna: Why is housing weak? Rates are still elevated, right? The Fed under Chair Warsh has kept rates higher for longer. Lucas: That's the big headwind. Mortgage rates are still above 6.5 percent, and affordability is stretched. Existing home sales are sluggish. But new home construction has been more resilient because there's a structural shortage of inventory. The National Association of Realtors estimates we're about 1.5 million units short of what's needed to meet demand. Builders like D.R. Horton have been able to offer rate buydowns and incentives to move product. Luna: So Berkshire is betting on that structural shortage, not on rates coming down soon. Lucas: That's the thesis. Todd Combs and Ted Weschler, Berkshire's investment managers, likely see a supply-constrained market where the biggest builders have pricing power. D.R. Horton alone builds about 80,000 homes a year. They have scale advantages that smaller builders can't match. And with land and labor costs still rising, incumbents with deep pockets can keep margins intact. Luna: But if rates stay high and the economy slows, could this bet backfire? Housing is cyclical. Lucas: Absolutely, it could. If we tip into a recession, homebuilder stocks could drop 20, 30 percent. Buffett has said many times that you shouldn't invest in homebuilders if you're worried about the next quarter. But Berkshire's horizon is measured in decades, not quarters. And they're doing this at a time when they have a record cash pile — over 200 billion as of March. Deploying six billion into housing is a meaningful but not reckless allocation. Luna: Right, they can afford to be patient. And the cash pile itself is earning around 4 percent in Treasuries, so they're not desperate to put money to work. Lucas: Exactly. The opportunity cost of not investing is lower when risk-free rates are above 4 percent. That actually gives them more discipline. They only swing when they see a fat pitch. And housing, after a three-year period of underperformance relative to the market, is starting to look like a fat pitch to them. Luna: You mentioned Clayton Homes earlier. That's interesting because manufactured housing is a different segment — lower price points, more rate-sensitive buyers. Why include that? Lucas: Clayton is the largest manufactured home builder in the U.S., and it's been a steady cash generator for Berkshire. They already own it, so the recent move is about expanding capacity — opening new plants, adding retail locations. The thesis there is that affordable housing is even more undersupplied. The median new home price is over 400,000. A manufactured home can be half that. So Clayton is targeting the entry-level buyer who's been squeezed out of the traditional market. Luna: That makes sense. And it's a different risk profile — less exposed to land costs, more exposed to consumer credit. Lucas: Right. And Berkshire also owns a huge mortgage operation through Berkshire Hathaway Energy and its real estate brokerage, HomeServices. So they see the whole ecosystem. They know who's buying, what they're paying, and where the bottlenecks are. Luna: Speaking of understanding the ecosystem — if our money conversations have helped you think about a decision differently, honestly, if today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. It keeps the show ad-free and independent. Lucas: Yeah, and we really mean it — no pressure, just if you get value from these discussions. Now, back to the housing bet: one thing I find striking is that Berkshire is doing this at a time when many institutional investors are rotating out of housing into tech. The NASDAQ is at 26,800, and AI stocks have been the main story. Luna: So it's contrarian in a way. But is it value investing or just a bet on demographics? Lucas: I think it's both. The demographic tailwind is real — millennials are still forming households, and the largest cohort is just entering their peak homebuying years. But the valuation piece matters more. D.R. Horton trades at around 12 times forward earnings. The S&P 500 is at 22 times. So you're paying a significant discount for a business that has pricing power and a structural demand backlog. Luna: And Berkshire's cost of capital is essentially zero. They can fund these investments internally without issuing debt or equity. Lucas: That's the superpower. Most investors can't replicate this. If you want to bet on housing, you buy the stock or an ETF. But Berkshire can write a check for a whole company, or buy a meaningful stake and have a board seat. They can also provide capital to their housing subsidiaries to expand capacity. That's a different class of investing. Luna: So for the retail investor listening, what's the takeaway? Should they follow Berkshire into housing? Lucas: Not blindly. But I think the framework is useful. Look for businesses with competitive advantages in a supply-constrained market. D.R. Horton has scale, brand, and land banks. The smaller builders don't. Also, pay attention to the cycle. Housing is interest rate sensitive, but the shortage is structural. If you can hold for five years plus, the odds tilt in your favor. Luna: And the cash pile gives Berkshire the ability to average down if the bet goes wrong. Most of us don't have that luxury. Lucas: Exactly. So the lesson isn't 'copy Berkshire.' It's 'understand the thesis and your own time horizon.' For Berkshire, housing is a long-term play on America's demographic deficit. For a retail investor with a high-conviction view, it could be a diversifier in a portfolio that's probably overweight tech. Luna: And with the S&P at 7,557, finding value is getting harder. Housing might be one of the few sectors where you're not paying a premium for growth. Lucas: Well, that's the question we should leave listeners with. If you were allocating a concentrated portfolio today, would you rather own D.R. Horton at 12 times earnings or Apple at 30 times? There's no right answer, but it's a useful framing. Luna: And with Berkshire putting six billion dollars on the table, they're telling you where they see the asymmetry. That's worth paying attention to.