Why Warren Buffett Thinks Home Sales Are on the Rise

The National Association of Realtors reports that U.S. pending home sales rose by 8.2% in February — a big increase over recent months.

Why the upswing? It could have something to do with the end of lower interest rates, the end of the homebuyer’s credit and the end of low inflation.

Or, it could have something to do with Warren Buffett. The Sage of Omaha predicted the housing rebound back in February. In a letter to Berkshire Hathaway (Stock Quote: BRK.A) shareholders on Feb. 27, Buffet said that by mid-2010, we’d be looking at the housing woes in the rearview mirror. “Within a year or so, residential housing problems should largely be behind us,” wrote Buffet. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.”

Buffett has put his money where his mouth is. In 2009, Berkshire Hathaway made $187 million in its stake in a housing construction company it owns. Buffett says that the market should be even stronger for housing in 2010, giving hope to both economists and actual homeowners that good news finally might be on the way.

His reasoning? Primarily, Buffett believes that the U.S. housing market was overbuilt during the past decade and is just now finding its balance. In his letter to shareholders, Buffet points out that the demand for new homes is roughly at 1.2 million homes annually. But the U.S. housing market has averaged about 2 million new homes per year, leaving a glut of homes on the market facing weak demand in a lousy economy. Now that the glut is heading downward again, the housing market, Buffett believes, is regaining its balance.

That said, not all areas will see the immediate rebound that Buffett estimates. Hard-hit areas like Florida, Nevada and Arizona, where new homes were built at a rapid pace during the mid-2000s, will see a significantly lower recovery rate, as demand slowly but surely catches up to the surplus of houses on the market.

If you liked this article you might like

Questions You Must Ask a Car Salesperson to Avoid Getting Ripped Off Big-Time

5 Surefire Ways to Destroy Your Marriage

Best States for Retirement in the U.S.

Worst States for Retirement in the U.S.

I Had $150,000 in Debt and Was Still Able to Buy a Home -- Here's How I Did It