Despite High Interest Rates, Berkshire Hathaway Is Bullish On Homebuilders

While Berkshire Hathaway has been mostly selling stocks throughout most of the year, the Warren Buffet-led firm made a significant investment in three homebuilders in Q2, which signals a long-term vote of confidence for the industry during a time when the broader housing market continues to show signs of stress.

Berkshire invested a combined $814 million in D.R. Horton (DHI), Lennar (LEN), and NVR (NVR), according to a recent 13F filing. While many investors closely monitor Berkshire’s activity due to Buffet’s track record of success, it’s not clear which of the firm’s investment managers handled the transaction.

D.R. Horton made up the majority stake of the homebuilder equity acquisition with 6 million shares valued at $726 million at the time of purchase, a nod to the company’s upside potential in the current market.

The homebuilder is seeing a major spike in business as housing inventory remains low. With high interest rates, many would-be sellers are reluctant to sacrifice their low rates and as a result, many are electing to stay put and demand is far outweighing available homes. Companies like D.R. Horton should continue to benefit from increasing demands for new construction. The firm sold over 4,000 single-family homes to Pretium Partners in a $1.5 billion deal last quarter and as of July, sales have been up over 70% since Q4 of 2022 with no signs of cooling off any time soon.

However, high interest rates are weighing on buyers too, so D.R. Horton has been highly focused on developing a rent-to-own model and single-family rentals. Over the last 3 years, the firm has invested over $1 billion into these initiatives. Multi-family and single-family rentals are expected to generate $800 million in revenue for the firm this year.

As of mid-September, D.R. Horton and Lennar’s stocks are up roughly 28% on the year, and NVR is up almost 35%.

Despite the long-term vote of confidence from Berkshire, the housing market has been showing some recent signs of distress. The average 30-year fixed mortgage rate jumped from 2.8% in February of 2021 to 7.6% in August, which led to a significant drop in homebuilder sentiment this month. The index fell 6 points to 50, which is teetering on the edge of negative territory.

Mortgage refinance and home equity borrowing has slowed drastically due to high interest rates, which also means many home remodeling and renovation projects have taken a backseat. Home Depot announced a 2% drop in sales last quarter — a trend that is also expected to continue throughout the year.

Many of Berkshire’s homebuilding and remodeling businesses are facing pressure due to high interest rates. Clayton Homes, Berkshire Hathaway HomeServices brokerage, and Benjamin Moore Paint all posted lower Q2 earnings, and Berkshire has warned of further declines throughout the year. However, the company’s recent investments signal a potential long-term upside in the industry.

Still, the purchase represents a very small portion (0.25%) of the firm’s $353.4 billion portfolio.

Despite the recent stock purchase, Berkshire has been in selling mode throughout most of the year. The company unloaded $7.98 million in stocks last quarter and $10.4 billion in Q1. It exited positions in Occidental Petroleum (OXY), Capital One Financial (COF), and reduced its stake in Chevron (CVX); however, the top 10 positions in the firm’s portfolio, including Apple and Bank of America, were unchanged.

While the overall housing market is facing significant headwinds, Berkshire Hathaway’s recent investments signal some potential long-term upside for homebuilders as we head into 2024.