Berkshire Hathaway 2009 Annual Meeting Audience Question # 6

Where the residential real estate market is headed in the next year or two

Warren Buffett:

OK, we’ll go to area 3.

OK, zone 3, are we on?

Audience Member:

I’m Laurie Gould from Berkeley, California.

Where do you see the residential real estate market headed nationally, particularly in California, over the next year or two?

Warren Buffett:

Well, we don’t know what real estate is going to do. We didn’t know what it was going to do a few years ago. We thought it was getting kind of dangerous in certain ways. But it’s very hard to tell.

I would say this. From what we’re… from what I’m seeing, and I do see a lot of data… there’s… and California, incidentally, is a very big… I mean, there are many markets within California. Stockton is going to be different than San Francisco and so on.

But, in the last few months, you’ve seen a real pickup in activity, although at much lower prices. But you’ve seen… I think you’ve seen something in the medium- to lower-priced houses. And medium means a different thing in California than it does in Nebraska.

But you’ve seen, in maybe $750,000 and under houses, you’ve seen a real pickup in activity, many more bidders. You haven’t seen it bounce back in price. Prices are down significantly and it varies by the area.

But it looks as if… you know, you had a foreclosure moratorium for a while. And so get into distortions because of that.

But what it looks like, looking at our real estate brokerage data… and we have the largest real estate brokerage firm in Southern California, in Orange County, Los Angeles County, and San Diego in Prudential of California that’s owned by MidAmerican… we see something close, I would say, to stability at these much-reduced prices in the medium to lower group.

If you’ve got a $5 million or $3 million house, that still looks like a very… erratic… it’s a market in which there still isn’t a lot of activity.

But in the lower levels, there’s plenty of activity now. Houses are moving. Interest rates, of course, are down so it’s much easier to make the payments.

The mortgages being put on the books every day in California, are much better than, you know, the mix that you had a few years earlier.

So it’s improving. And I don’t know what it’ll do next month or three months from now.

The housing situation is pretty much this way. You can look at it this way.

We create about 1,300,000 or so households a year. It bounces around some. But… and it tends to… in a recession, it tends to be fewer because people postpone matrimony and so on to some extent.

But if there’s 1,300,000 households created in a year and you create two million housing starts annually, you are going to run into trouble. And that’s what we did. We just created more houses than the demand was… the fundamental demand… was going to absorb.

So we created an excess of houses. How much excess is there now? Perhaps a million and a half units. We were building two million units a year. That’s down to 500,000 units a year.

Now, if you create 500,000 units a year and you have a 1,300,000 households created, you are going to absorb the excess supply.

It will be very uneven around the country. South Florida’s going to be tough for a long, long time. So it isn’t like you can move a house from one place to another if there’s demand in one place and not another.

But we are eating up an excess inventory now. And we’re probably eating it up at the rate of 7- or 800,000 units a year. And if we have a million and a half excess, that takes a couple of years. There’s no getting away from it.

You have three choices. You could blow up a million and a half houses, you know. And if they do that, I hope they blow up yours and not mine, but that’s a…

We could get rid of it. We could try to create more households. We could have 14-year-olds start getting married and having kids, and…

Or we can produce less than the natural demand increase. And that’s what we’re doing now.

And we’re going to eat up the inventory. And you can’t do it in a day. And you can’t do it in a week. But it will get done.

And when it gets done, then you’ll have a stabilization in pricings. And then you will create the demand for more housing starts.

And then you go back up to a million and a quarter, and then our insulation business and our carpet business and our brick business will all get better.

Exactly when that happens nobody knows. But it will happen.

Charlie?

Charlie Munger:

Oh, I think in a place like Omaha, which never had a really crazy boom in terms of housing prices, with interest rates so low if you’ve got good credit, that if I were a young person wanting a house in Omaha, I would buy it tomorrow.

Warren Buffett:

We own the largest real estate brokerage firm in Omaha. So… Charlie will be… if he qualifies, we will give him a mortgage application.

If is true that 4 1/2 million houses will change hands. There’s about 80 million houses in the country. Twenty-five million of those do not have a mortgage. About a third of the houses in the country do not have a mortgage. You’ve got about 55 million, or a little less, that have a mortgage. And five or six million of those are in trouble one way or another.

But we’re selling 4 1/2 million houses every day. And by and large, they’re going into stronger hands. The mortgages are more affordable. The down payments are higher. We’re… the situation is getting corrected.

But it wasn’t created in a day or a week or a month. And it’s not going to get solved in a day or a week or a month. We are on the road to solution.

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