LONDON -- Investment genius Warren Buffett -- the world's third-richest man, with a personal fortune of $44 billion -- is renowned for making big, bold bets on the future direction of the U.S. economy.
For example, the giant conglomerate Buffett runs, Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , bought Burlington Northern Santa Fe -- one of America's biggest railroad firms --for $44 billion in February 2010. In September 2011, Buffett followed this by spending $9 billion buying lubricant maker Lubrizol.
Unsafe as houses
However, one of Buffett's biggest bets is steadily increasing Berkshire's exposure to any future turnaround in the weakened U.S. property market.
Until they peaked in mid-2006, ever-rising home prices were a mighty engine driving the U.S. economy. Rising home equity fueled ever-increasing borrowing and spending, propelling U.S. economic growth well above its long-run average.
Then came the subprime-mortgage crisis, followed soon after by a global credit crunch and deep recession. After the housing bubble burst, U.S. home prices dived by 28% between June 2006 and March 2012, according to U.S. mortgage behemoth Freddie Mac.
What's more, following massive losses and taxpayer-funded bank bailouts, risk-averse investors have come to regard U.S. housing and mortgage securities as "toxic waste" to be avoided. But not Buffett. Where others see danger, he sees opportunity. Where they see past losses, Buffett looks ahead to future profits.
A huge bet on housing
"Housing will come back -- you can be sure of that."
-- Warren Buffett, February 2012
For almost a year, Buffett has suggested that U.S. home prices have returned to reasonable levels and that the U.S. housing market is poised for a (modest) recovery. Thus he is ramping up Berkshire's ownership of firms with heavy exposure to a sustained recovery in home prices and sales. Last week, the Oracle of Omaha bid nearly $4 billion to buy a portfolio of distressed loans.
Yesterday, Bloomberg reported that Berkshire Hathaway has offered $3.85 billion to buy a mortgage business (for $2.4 billion) and loan portfolio (for $1.45 billion) from Residential Capital. This lender was owned by GMAC, the finance arm of General Motors, until it was placed into bankruptcy so as to protect its parent company, Ally Financial.
In addition, Berkshire Hathaway is the largest shareholder in Wells Fargo (NYSE: WFC ) , currently America's No. 1 mortgage lender with a market share exceeding 30%. Recent regulatory filings reveal that Berkshire is increasing its stake in Wells Fargo by buying more shares.
Further, Berkshire's real-estate unit, HomeServices of America, is snapping up rival real-estate brokers, ready for any rebound in home sales. In January 2011, Berkshire added to its "brick-and-mortar" portfolio by agreeing to buy Jenkins Brick to add to Acme Brick, its existing brick maker. Clearly, with the number of U.S. households rising faster than the number of housing starts, Buffett expects demand to increase, with squeezed supply spurring new property developments.
Is Warren right?
It's far too early to say whether the 81-year-old investor's brave bet on U.S. housing will pay off.
Then again, a few housing indicators have picked up recently. For instance, foreclosure filings (repossession actions) have fallen for 20 months in a row. Also, U.S. house prices leapt by 1.8% in March, their biggest monthly rise for 20 years, driven by ultra-low mortgage rates.
Nevertheless, the Nebraska-based investment wizard seems to be doing something he has done successfully many times in the past. He's buying assets on the cheap at a time of market distress and then waiting patiently for their prices to recover. For this reason, I certainly wouldn't bet against Buffett's prediction of a turnaround in the U.S. housing market!
By the way, do you know which British business Warren Buffett has been gleefully buying into in 2012? To find out which FTSE 100 firm the Oracle of Omaha is backing, simply download your free copy of our latest report, "The One UK Share That Warren Buffett Loves."
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