Can Warren Buffett Save the U.S. Housing Market?

The Dow Jones Industrial Average is quiet today, giving us a moment to consider a fundamental economic challenge facing the nation: housing.

Apr 24, 2014 at 1:00PM
Take The Long View

After giving up early gains, the Dow Jones Industrial Average (DJINDICES:^DJI) broke out of the red and was up 26 points at 1 p.m. EDT following an array of positive earnings releases. The cause of the blue-chip index's up-and-down day? There is tension in Eastern Europe, yes. There is the ever-present threat of a zombie apocalypse, of course.

But there is something else souring the markets right at your doorstep, in your kitchen, and even watching you as you sleep!

It's your home. Or rather, it's the housing market. And it's causing serious anxiety for many investors.

After six years of this story, you'd think the housing market would have fixed itself by now!
It appears then that this year's spring selling season has stumbled badly out of the gate. This week's new home sales report for March showed a 14.5% seasonally adjusted drop -- the second monthly decline and the lowest level in eight months. Investors, unsurprisingly, were not pleased.

Step back from the actual numbers, and the problem becomes more clear and much, much larger.

Interest rates began rising last year and are poised to increase further as the Federal Reserve scales back its near-zero rate policy over the coming quarters. At the same time, home prices across the board are rising to levels not seen since the heyday of 2006. One economist this week went so far as to call the market "overheated."

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts.

Worse yet, there are more fundamental problems in the market beyond simple affordability.

Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) remain under the control of the U.S. government while functioning as the only real players in the secondary housing markets. As it stands, Fannie and Freddie are the only entities in today’s secondary market willing to buy and then resell mortgage loans made by banks. This could limit banks' ability to make more loans in the event that Fannie or Freddie encounters problems. In essence, all of our mortgage eggs are in the one Fannie and Freddie basket.

It's a systemic problem
The housing crisis was a very unfortunate result of imperfections in the system, but the fact is that Fannie and Freddie are very effective at making homeownership viable for millions.

Without Fannie and Freddie the costs of owning a home would increase dramatically. Mortgage interest rates in the U.S. are as low as they are in large part because the mortgages can be sliced and diced, securitized, and sold to investors across the world. We have Fannie and Freddie to thank for that.

Home New Construction

The standard 30-year mortgage in the U.S. is a rarity in global real estate markets. In many developed countries, the mortgage market only tolerates a 15 or 20-year mortgage. The ability to pay back the loan over that extra 10 years makes the monthly costs of homeownership dramatically lower. The result is an appreciably higher standard of living.

And for the vast majority of Americans, homeownership is a good thing. I've written before that homeownership may not be best for everyone, and I stand by those arguments. However, the empirical truth is that Americans who own their home have a net worth that is significantly higher than those who rent.

How does it play out from here?
The bottom line is that until Freddie and Fannie are either fixed, changed, or replaced, and until there is a clear path to ensure affordable 30-year mortgages for American homeowners, we will still have issues in the housing market. 

Yesterday, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) Chairman Warren Buffett more or less backed a plan led by President Barack Obama and a bipartisan group of senators to wind down the two entities. Buffett said the government could assume the role of insurer of last resort, which would bring sufficient confidence to the new system to enable a smooth transition.

Buffett Georgtown

Warren Buffett. Source: Georgetown University

Buffett added that Berkshire Hathaway and other private companies could step into a larger role in the housing market, though he was clear that there is no place at Freddie or Fannie for Berkshire. 

Others believe Fannie and Freddie should be turned into privately controlled entities and that their business model remain more or less unchanged. The only real change would be that the government would no longer have an ownership stake. 

At this point, it's premature to say what the outcome will be. It's a very positive sign that leaders from the investing world are involved in the discussion, as the solution will almost certainly require private capital and nongovernmental entities to work. 

Whatever the outcome, it can't come soon enough. There are short-term risks in implementing any change of this scale, but the long-term risks of failing to make the needed changes are absolutely massive. The government needs to act quickly, but also prudently and transparently, to fix the systemic problems. 

The future of home ownership in America depends on it.

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

There was a problem reaching the disclosure generator. Please try again.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information