Warren Buffett said in this year’s Berkshire Hathaway annual letter that he was wrong before he was right about calling a bottoming in the housing market — “dead wrong” — but now he will be right, finally, in saying the corner is turning, or about to be turned in the housing market.
In other words, parsing Buffett’s words on housing is a fool’s errand for an investor.
Take building materials company USG Corp., a stock shunned by most of Wall Street but loved by Buffett, who owns more than 17 million shares. USG is a building-materials company that fits perfectly in the theme that a rising housing tide will lift the Berkshire Hathaway boat, as it has a heavy investment in housing, from building construction plays to carpet and furniture makers, home builders, and mortgage providers.
On Wednesday, USG announced better-than-expected sales through the first two months of the year, thanks to a pricing increase in its gypsum wallboard market, driving margins higher for the first quarter. Through February, the company’s net sales totaled $516.9 million, up 16 percent from the year-ago period.
Shares of USG hit a new 52-week high of $19.44 in intraday action on Wednesday, and the stock has gained nearly 70 percent already this year. It recently changed hands at $19.13, up nearly 12 percent on the day.
Permits for U.S. home building neared a 3 1/2-year high in February. Multifamily housing permits continue to go higher and even the embattled single-family home permit number is up nine out of the past 12 months. Existing home sales, though, disappointed on Wednesday, though some market pundits said disappointed “not by much.” Others point to the ambivalent data showing that whether existing home sales disappointed by a little or a lot, they remain near a long-term average. Home prices haven’t rebounded, but they have stabilized somewhat, and so the market pundits still say that all in all, it’s time to call a bottom in housing, including Warren Buffett.
Here’s what the Oracle of Omaha had to say in his recent annual letter:
“Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong...Housing will come back — you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households.”
So is it an all-clear on housing, or is it time to take profits in USG before it’s too late and the housing market struggles forward?
Stifel homebuilding analyst Michael Widner thinks that the argument over a bottom in housing is what is at least a year too late.
“I’m one of the most bearish guys out there and things are stable to improving, but whether it’s sustainable remains to be seen," the analyst said.
“It’s hard to say it is all good from here,” Widner said. “The real question is how sharp a turn are we talking about. Lots of people believe we are embarking on a step change.”
Widner projects a 15 percent to 20 percent growth in housing starts this year, and every building company including USG should be happy about that trend, but that’s already in his bearish outlook, while the bulls on Wall Street talk as if a doubling is on the way.
“I don’t know one bear who thinks there is a major leg down in housing coming,” Widner said. “There is no opposite side to trumpet.”
That doesn’t mean, though, that the bullish trumpets should be echoed.
Widner said if you look at most of the housing stocks, the equity recovery was already underway in 2011 before the October market bottom. There was an extreme turn to the negative last fall and now another turn to the extremely positive, pushing values even higher that 2011’s recovery levels.
“The sentiment is overblown both ways each year,” the analyst said.
When looking at the USG numbers through the first two months of 2012, Widner cautions that the unseasonably warm winter weather across the U.S. should make many housing market comparable stats look good year-over-year. For investors who missed this leg up in housing-related stocks, the current sentiment may not be the trigger to buy.
“Is this a major market swing or just a pull forward by a few months?” the Stifel analyst asked.
Widner cautioned that there is a difference between the real world and the stock market, and the difference between a perma-bull like Buffett and how to play housing stocks.
“If you are Buffett, you can prognosticate and always win in the end,” he said. “For a perma-bull, eventually it’s destiny, if nothing else because inflation drives prices higher.”
Reality is somewhat different though.
“I was just talking to an architect who saw his team go from double digits in 2005 to three, and he laughed at the idea of a step change. When I asked if business picking up meant it was heading back to normal, he laughed again,” the analyst explained. “Better doesn't mean good.”
Just don’t tell that to Buffett, who is willing to wait a long time before being right.
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