Buffett Bullish on U.S. Real Estate
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Did the Berkshire CEO buy the properties surrounding his Omaha home to build a shrine to Ben Graham? Did he buy a house next door to his buddy Munger? Well not that we know of...but that wouldn’t be surprising. Buffett is actually throwing billions into a bid for a bunch of home loans and mortgages.
ResCap LLC, one of the subprimes of the subprime era, is selling a ton of mortgages as they battle with bankruptcy. Buffett’s Berkshire Hathaway (NYSE: BRK-B) has bid $3.46 billion for these assets and given Berkshire’s history of shrewd bids, we can assume this price will give them a decent return and a margin of safety. Berkshire already owns some of ResCap’s debt so if Berkshire’s bid is accepted they will be doubling down on housing loans.
Berkshire has also been buying up America’s mortgages by purchasing billions worth of Wells Fargo (NYSE: WFC) stock for years. Wells is the number one home lender in the US and seems to be rapidly expanding. In 2011, Wells originated $6 billion in new mortgages. In the last 10 years their market share of the home mortgage originations has increased from about 9% to about 27% (much help attributed to their Wachovia purchase). Berkshire must like these numbers given their Wells Fargo stock purchases in 2011 Q3, 2011 Q4, and 2012 Q1.
Guess what? Berkshire has also been investing in another massive mortgage originator: Bank of America (NYSE: BAC). Even though BofA was a wild ride in 2011, they were creating piles of new mortgages. Over $4 billion in home loans came out of this bank in 2011. Investors in the crazy stock have been handsomely rewarded in the last 6 months with a nice 50%+ return.
Buffett also has other real estate exposure in some private holdings. Berkshire owns Clayton Homes (manufactured homes), Acme Bricks (um...bricks), Shaw Carpets, and real estate brokerages.
So how can we ride the Oracle's coattails?
If you have a few billion, you could make a bid on the ResCap mortgages. For those of us without Rockefeller in our name, several stocks are better options. If you have similar thoughts on the US real estate market you could simply invest in an ETF, like SPDR DJ Wilshire REIT ETF (NYSEMKT: RWR). This ETF has almost $2 billion in US real estate assets and yields about 3% annually. It holds some of the biggest real estate companies in the world.
Or you could really follow Buffett’s path and invest in the mortgage lenders like WFC and BAC. You get a huge exposure to US real estate and a Buffett-approved management team.
The other option is buying that $4,000 house in Detroit...maybe not.
mthiessen has no positions in the stocks mentioned above. mthiessen runs a company that invests in private and public companies. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Berkshire Hathaway and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
