Berkshire Hathaway 2013 Annual Meeting Audience Question # 59

Warren doesn’t think there’s another housing bubble developing

Warren Buffett:

OK. Station 11.

Audience Member:

Hello, Mr. Buffett, and Mr. Munger. My name is Brandt Hooker from Los Angeles.

I want to thank you both, first of all, for all the years of advice and your financial philanthropy, as well as your education and/or knowledge philanthropy you’ve given to so many investors around the world.

And my question is: the U.S. government was seemingly complicit in enticing the American public to buy a home, and, therefore, a mortgage, at any cost. Do you think our legislators are doing the same thing now, and are we creating a bubble?

Warren Buffett:

No. I don’t think we’re remotely near a bubble, in terms of housing, now.

And I certainly think that your statement is accurate but not complete, in terms of what went on before.

I mean, the whole country, almost, every… really kind of went crazy in terms of housing. And the government was a very big part of it because they’re a very big part of the financing of it.

And it’s certainly true that plenty of legislators were encouraging Freddie and Fannie to be doing things that they shouldn’t have been doing, not just in retrospect. I mean, if you looked at it at the time, you could come to that conclusion.

But there were an awful lot of people doing the same thing. I mean, it was coming from all sources. And it had that aspect to it, which bubbles do, where year after year for three or four or five years, whatever it might be, that the skeptics looked like idiots and that the people who jumped on the bandwagon were the ones that were refinancing their houses at ever higher prices and people who were speculating on other houses.

So it just looked all so wonderful. And people are really susceptible to that sort of bandwagon effect where they see their neighbors making easy money, everybody’s making easy money but them, and they finally succumb.

It’s just… it’s the nature of things. And it doesn’t mean the people at Freddie or Fannie were necessarily evil… a few of them were… or that legislators, necessarily, were evil, although, again, a few of them probably were. But overwhelmingly, I think most people just get caught up in a grand illusion.

And, you know, it’s happened many times in history, it’ll happen again, and you can use that very much to your profit.

We’re not in that kind of a period now on housing. You’ve got very, very low interest rates, which support, in many cases, the purchase of houses, because it brings down the payments, obviously.

But I personally, about a year ago, I mean, I recommended to people that they buy houses, and

I certainly recommend to people that they finance them now.

And most places I would recommend if you find a… if you’re going to live in the community for some time and you find a house that fits your needs, I think it’s probably a very good time to buy it, in part because the financing is so unbelievably attractive.

Charlie?

Charlie Munger:

Well, the main problem was that as things got crazier and crazier, the government could’ve intervened by pulling away the punch bowl before everybody was totally drunk, and instead, the government increased the proof.

And this was not a good idea. But you… it’s hard to get governments in a democracy to be pulling away the punch bowl from voters who want to get drunk.

Warren Buffett:

Well, it’s almost impossible.

Charlie Munger:

Yeah.

Warren Buffett:

Yeah. I mean, it isn’t…

Charlie Munger:

So you’re complaining a little bit about what’s sort of inevitable in life. Not too good an idea.

Warren Buffett:

Yeah. You’ll see it again, not necessarily in housing, but you will see it.

And humans will continue to make the same mistakes that they have made in the past.

I mean, they get fearful when other people are fearful. I mean, that’s… you saw it in those money market funds when 175 billion, you know, flowed out in three days. I mean, everybody gets… when people get scared, you know, they… it’s very, very pervasive.

I’ve often thought that, you know, if I owned a bank in a two-bank town, you know, I’d… if I were inclined to… I might hire a whole bunch of Hollywood extras to form a line in front of the other guy’s bank.

The hell of it is that they… you know, as soon as they got through forming a line there, they’d start forming a line at my bank because they… people really get… they get fearful en masse.

Confidence comes back sort of one at a time, but when they get greedy, they get greedy en masse, too.

I mean, it just… it’s just the way the humans are constructed. That’s where Charlie and I have an edge. We don’t have an edge, particularly, in many other ways.

But we are able, I think, perhaps better than most, to not really get caught up with what other people are doing. And, you know, I don’t know whether we learned that over time or what.

But when we see falling prices, you know, we think it’s an opportunity to buy, and it doesn’t bother us.

Now, we don’t own things on margin or, you know, we don’t get ourselves in a position where somebody else can pull the rug out from under us. That’s enormously important in life. You never want to, you know, get out on a limb.

And, of course, leverage gets very tempting when things are going up. And leverage was what was introduced into housing in a huge, huge way. I mean, people just felt that you were an idiot if you didn’t keep borrowing more on your house, and using that to buy more houses, or using it to live on, or whatever, and then finally the roof fell in.

Charlie?

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