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Warren Buffett’s Favorite Housing Metric Just Flashed A Major Signal: What To Watch In The Housing Market

Berkshire Hathaway CEO Warren Buffett explained the metrics he watches for a reversal in the housing market.
Philanthropist Warren Buffett is joined onstage by 24 other philanthropist and influential business people featured on the Forbes list of 100 Greatest Business Minds during the Forbes Media Centennial Celebration at Pier 60 on September 19, 2017, in New York City. While the macro situation affecting the housing market today is almost the opposite, the main idea from the Oracle of Omaha still stands, and that key metric ticked down again this month. DANIEL ZUCHNIK/BENZINGA

Berkshire Hathaway Inc CEO Warren Buffett once explained one of the metrics he watches for a reversal in the housing market is a reduction of housing starts.

The Oracle of Omaha said in 2010 that sometimes a “bad number” for housing starts is a good thing for the market — in this case, he was referencing a cool housing market in which supply outstripped demand. The only way to solve that was to create more demand than supply by reducing the number of newly built homes.

While the macro situation affecting the housing market today is almost the opposite, the main idea from the Oracle of Omaha still stands, and that key metric ticked down again this month.

Some experts expect rates will stay below their 2022 highs. “There are nascent signs of inflation coming under control, and the Fed is signaling that it may slow down its rate increases going forward,” says Sean Roberts, CFO of Orchard, a real estate tech company. “This shift is creating some optimism that mortgage rates may continue going down throughout 2023 and beyond.”

As a result of consumers being turned off by high mortgage rates and builders being compelled to cut back, construction on new homes decreased 0.5% from October, and this trend is expected to continue through 2023.

U.S. housing starts slowed to an annual pace of 1.427 million last month from 1.43 million in October and 1.49 million in September. Single-family housing starts dropped 4.1% to a rate of 828,000, while the rate for units in buildings with five units jumped 4.8% to 584,000.

Compared to November 2021, housing starts fell 8.8%.

Luxurious mansions houses in Coral Gables, Florida. The city was one of the first planned communities featuring Mediterranean Revival style architecture. Home prices are just starting to come down from record highs, and 6.51% average 30-year fixed mortgage rates inflict a burden on buyers that directly affects new construction. ROBERTO MACHADO/BENZINGA

Additionally, the number of permits, which indicates how many homes will likely be built in the coming months, decreased drastically from a record 1.9 million last December by nearly 29%% to a rate of 1.35 million.

Despite the housing shortage, which some experts estimate to be between 2 million and nearly 6 million newly built homes, fewer individuals can now afford to buy a home. 

Home prices are just starting to come down from record highs, and 6.51% average 30-year fixed mortgage rates inflict a burden on buyers that directly affects new construction.

According to Moody’s Analytics Chief Economist Mark Zandi, prices will decline nationwide by around 10% from peak to trough, bottoming out in the summer of 2023.

Pandemic-era hotspots like Phoenix and Boise, which saw the highest price spikes, should see additional price declines.

“Markets like Phoenix, Las Vegas, Boise, Dallas, etc., that saw a 30-40% home price appreciation post-COVID and have a large upcoming supply of new homes are more likely to see declines of 20% or so,” says Tejas Joshi, Director of Single Family Rental (SFR) at Yieldstreet, an alternative asset investment platform for retail investors. “For others, it will be more tempered.” 

Just a year ago, mortgage rates set near record lows as home prices soared. Now, interest rates near 7%, while home prices have jumped nearly 40% since March 2022.

Unsurprisingly, that level of home growth is unsustainable in the current market. Now, there’s hope that the housing market is slowing down – albeit gradually, according to Forbes.

Prices in those areas could decrease by as much as 20%, according to Zandi.

Instead of trying to time the market, many investors are using this strategy to buy shares of individual rental properties with as little as $100 and earn passive income through all market cycles. 

 

Produced in association with Benzinga.

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