Berkshire Bets on the Northwest, Southeast
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Two months ago Warren Buffet announced that distressed real estate is a great deal for mom-and-pop investors who are “handy,” an announcement that conjures images of investors squatting under kitchen sink plumbing lines, wrench in hand.
Since Buffet himself is not the handyman-type, he opted to approach real estate in the way he knows best, by trying to buy the assets of a distressed company.
This week, Buffet’s firm Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) lost its bid to buy Residential Capital, the mortgage arm of Ally Financial, a holding company that is majority-owned by the US government.
The other competitor vying to become the new owner of Residential Capital, Fortress Investment Group LLC (NYSE: FIG), also lost its bid.
Now that both the Berkshire and Fortress bids have been rejected, Residential Capital’s assets will be sold at auction … much like a foreclosed home.
Many people have written stories about Berkshire’s big bet on housing. Some stories argue that its just one more sign that housing is on the road to recovery. Other stories argue the opposite.
But real estate is a profoundly local market. A recovery in, say, Minnesota doesn’t necessarily mean there will be a recovery in Hawaii. With the exception of the federal interest rate, there’s very little that connects interstate markets.
So is Berkshire betting that real estate is going to rebound equally across the nation? Or is it focusing on certain areas?
In my estimation, Berkshire’s moves appear to concentrate its bet on a housing recovery specifically in the Northwestern and Southeastern United States – specifically, in the Oregon/Washington area and the Georgia/Florida area.
Why do I think this?
#1: Brickmaker Locations.
For obvious reasons, it’s prohibitively expensive to ship bricks across the nation. Bricks are typically sold in the region in which they’re manufactured. The location of Berkshire’s brickmakers, then, gives us a clue about where the company expects new home construction to rise.
Berkshire has owned one brickmaker, Acme Brick, since 2000. Acme has plants in 7 states, mostly across the southern U.S. (with the majority in Texas, Arkansas and Oklahoma). Recently it acquired a second brickmaker, Jenkins Brick, which is based in Alabama and services the southeast.
Berkshire’s real estate arm, HomeServices of America, recently bought two brokerages. Both of these brokerages are based in the northwest – one in Seattle, and one in Portland, Oregon.
#3: Bidding Data
Let’s compare this to data we’re seeing around the nation. According to the real estate website Redfin, real estate agents in both Seattle and Oregon are receiving offers on houses in half the time it took last year. What’s better, they’re receiving multiple offers, putting buyers into a bidding war. Meanwhile, investing threads in the Georgia real estate investor's groups indicate that the same multiple-offer-bidding-wars are taking place in Atlanta.
#4: A Florida Enterprise
Berkshire co-created a company called Berkadia Commercial Mortgage LLC, which is a 50/50 joint venture with Leucadia National Corp. (NYSE: LUK).
This new company is specifically focused on a rebound in Florida, particularly in the multi-unit housing market. Berkadia CEO Hugh Fratier told Bloomberg, “We expect Florida to be a place that people will continue to migrate to for some time,” and the company recently acquired Tavernier Capital Partners LLC to give it immediate entry into the Florida market.
#5: Increasing Stake in Wells Fargo
Berkshire already holds a major stake in Wells Fargo (NYSE: WFC), the number-one mortgage lender in the nation. Recent filings indicate that Berkshire is looking to expand its stake in Wells.
Wells Fargo is one of the leading banks in the western U.S., and its acquisition of Wachovia Bank now makes it a dominant player in the southeast, as well. In fact, Berkshire bought its major stake in Wells shortly after the Wachovia takeover.
So What Does This Mean?
First you need to decide if you agree with my interpretation or not. If you do, then you can use the data in the following ways:
Option A: Disagree with Berkshire's assessment that the rebound will start in the Northwest and Southeast. Drop your shares of Berkshire and Leucadia. Concentrate on buying stocks in REIT's and regional banks that are centralized in the parts of the nation where you believe the rebound will begin.
Option B: Agree with Berkshire that the rebound will first take place in the Northwest and Southeast. Invest in that agreement indirectly through shares of Berkshire, Leucadia and Wells Fargo.
Better yet, you could directly pick up a rental property in Seattle, Portland or Atlanta. That is, if you're "handy."
PaulaPant has no positions in the stocks mentioned above. The Motley Fool owns shares of 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.