It could be three years or more until Warren Buffett is finally right on housing, based on a set of Goldman Sachs assumptions.
If you haven’t heard, Buffett in his annual Berkshire letter this week said he was “dead wrong” in thinking that the U.S. housing market would rebound by now. That assumption hurt his firm’s income. Berkshire’s five businesses tied to housing activity had pre-tax profits last year of $513 million, down from $1.8 billion in 2006.
But Buffett said on CNBC early this week that he would buy up millions of U.S. homes now if that were possible.
Here is his argument:
1) The U.S. had been adding more units than households before 2008.
2) That is now reversed, and there are more households being added than units
3) The numbers will match each other over time (a mean regression)
But again, when will all this happen?
Goldman Sachs makes the following assumptions that may help set a timeline, as reported by FT Alphaville:
— Net housing additions going forward should be 300,000 a year
— 800,000 households will formed this year
— 1.1 million new households will form in 2013, and each of the next 5 years
— Excess housing inventory is 2.5 mln units
That math works out to the inventory being cleared in mid-2015.
Keep in mind, a common belief is that the market (the stock market, at least) is always looking ahead 6 to 12 months. Should the housing market do the same (I am not making a call here, mind you) then what Goldman may be saying is that home prices could be set to rise another 2 1/2 to 3 years from now, which is still a long way off.