When Berkshire Hathaway's (NYSE: BRK-B) Warren Buffett talks, investors listen. One reason they trust Buffett so much? When he makes a bad call, he's more than willing to admit it.
That's what happened when Buffett prematurely called a bottom to the housing slump and predicted a recovery several months ahead of time. In his letter to investors early this year, he owned up his mistake -- but maintained that housing would indeed recover, albeit a little later than he thought.
As it turns out, he wasn't that far off. A few short months later, his housing-related investments are exhibiting the gumption that only a rebounding housing market can produce, and he's not the only big name investor to experience this upturn.
Housing turns a corner and then takes off
Bill Miller, former star of Legg Mason's (NYSE: LM) Value Trust before it tanked in 2005, has sunk one-third of his new fund, Legg Mason Capital Management Opportunity Trust (LMOPX), into housing-related stocks. And guess what? The fund, according to Bloomberg, is returning 30%, more than any other fund in its class.
The housing rebound has been around all year, though for most of that time it has been on a seesaw that has caused analysts to change their minds almost daily about its permanence. More recently, the housing market seems to have gotten its land-legs, and the performance of investments such as Buffett's and Miller's seem to prove the point.
What are these stocks that the big guys are holding?
Not surprisingly, perennial Buffett favorite Wells Fargo (NYSE:WFC) reported gargantuan profits from its souped-up mortgage origination machine this past quarter, the income from which more than doubled from last year. In addition, Clayton Homes, a subsidiary of Berkshire Hathaway, has seen earnings increase by 45% since a year ago. And, of course, there is Buffett's intense interest in picking up the whole bundle of Ally Financial's bankrupt ResCap loan portfolio, including those juicy mortgage servicing rights.
Miller, who has also been predicting a resurgent housing market, has invested in huge homebuilding and financing company PulteGroup, (NYSE: PHM), whose stock has climbed by 255% since last year, and housing construction giant Lennar (NYSE: LEN), which has seen a stock jump of 127%. Also residing therein is KB Home (NYSE: KBH), another huge homebuilder that has felt investor love over the past year, as well as mortgage investment firm Ellington Financial (NYSE: EFC). Miller has also included Bank of America (NYSE:BAC), assuming, perhaps, that it will get its fair share of mortgage action once things really pick up in the homebuying market.
These guys aren't the only investors seeing some positive trends in their holdings. Shareholders of Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) have seen those stock prices climb this year as well, with much of the surge occurring over the past two months. Even the less-than-spectacular Q2 results at Lowe's didn't dampen the rally, as both investors and analysts are expecting a better housing climate to continue to boost fortunes of the nation's second-largest home-improvement center.
Tailwinds aplenty, but headwinds remain
There's little doubt that a housing revival is upon us, and the recent news that September's housing starts jumped 15% over August's -- and a full 35% year over year -- is proof positive that an upward trend is under way. Good news, but there are some very real dark clouds on the somewhat-brighter housing recovery horizon.
The lingering foreclosure crisis is holding back some sections of the country, notably the Northeast and areas such as Florida, which was hit especially hard by the downturn. In Florida, foreclosures are increasing now that new rules and changes regarding judicial foreclosure proceedings have been implemented, freeing up the pipeline once again. This is happening in other states as well.
Another big problem is jobs. Certainly, it will be difficult for a housing recovery to sustain itself without a big improvement in the employment picture. The Federal Reserve's QE3 program is meant to increase business investment, and therefore jobs, but its effect cannot be ascertained yet. Even with better employment numbers, however, there's still a good chance that many would-be buyers will be unable to obtain financing because of super-strict new credit standards. The lowest interest rates in the world won't help if the banks won't loosen the purse strings.
Still, there's something here for investors
There's no doubt the juices are flowing for the housing industry, and investors have a few ways to get into the action. I think Home Depot and Lowe's look particularly interesting, as they can double-dip somewhat on the upswing. Not only will they be grabbing the pre-sale home spruce-up contingent as the market for existing homes begins to heat up, but they will also be part of the market that supplies homebuilders.
To me, that sounds like a pretty good way to ride the housing-rebound investment wave.
Fool contributor Amanda Alix has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and Wells Fargo. Motley Fool newsletter services recommend Berkshire Hathaway, Home Depot, Lowe's, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. 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.