And I just don’t like them. I know its frustrating to have a condo purchased for 99,000 that may no longer be worth that (especially since I am not making any great money on my house either). That is what happens tho in overheated indutries I think… just watch the infomercials. Everybody and their nephew thinks they can be a big real estate investor. This leads to speculation and over-inflated prices. “… At the beginning, [prices are] driven by fundamentals, and at some point, speculation drives [them]. What the wise man does in the beginning, the fool does in the end.” to quote the Oracle of Omaha from the most recent Berkshire Hathaway Annual Meeting.
Speaking of the Oracle, he spoke on the subject of residential real estate during Q&A:
Question: What are your thoughts on the residential real estate market in the U.S.? Where is it headed? How is California different?
Warren Buffett: We managed one time to develop a great piece of property in California for over 20 years. That’s not an exaggeration. We nurtured the land value, and we cashed out for 5 or 6 million dollars. We finished at the wrong time. What do you think it would be worth now, Charlie?
Charlie Munger: Maybe $100 million. [Gasps from crowd].
Warren Buffett: Everything is wonderful about it — terrific climate, wonderful location, on the water. But from time to time, even in great localities — you’ve seen it happen in New York a couple of times — the swing in values has just been huge. What we’re seeing in our residential brokerage business is a slowdown everyplace, most dramatically in the hottest markets. The market where you see the greatest falloff tends to be the high end, where people have bought for investment rather than use. People will pay $300,000 and mortgage $270,000 for the house, and if it goes to $250,000, they won’t sell it or move if they have a job. But when you have investment or speculation-type holdings, when you’ve had day traders of the Internet move into the day trading of condos, then you get a market that can move in a big way.
Real estate is different from stocks. If you own real estate, there is a great tendency to look at the one that sold down the street a few months ago. In Dade and Broward counties (in Florida), for example, where the average condo was $500,000, if you go back to 2004, there were fewer than 9,000 condos for sale, and around 2,900 would sell per month, so turnover was less than four months. Now, there are 30,000 condos for sale, or $15 billion in property, and turnover is less than 2,000 per month. We have had a bubble in residential real estate to some degree. I think there will be downward pressure in prices, especially on higher-end properties. In Omaha, prices will be OK.
Charlie Munger: Bubbles came in Manhattan and California. In Omaha, housing is quite reasonable, so the [rural] country is not all the same at all.
Warren Buffett: I just got word that attendance [at the meeting] is 24,000 this year. Even better, at Nebraska Furniture Mart, which had 1997 sales of $5.5 million, sales last year were $27 million, and we’re likely to do over $30 million this weekend, which is equal to normal monthly sales.
June 30th, 2006 at 12:27 pm
It’s interesting that when an investment becomes a topic of discussion at social visits, it is a very good time to sale. When we left Casper in the late 70’s, real estate investing was “the thing.” Everyone in town had a friend who made a killing on a piece of property during the mid 70’s. Therefore, speculation grew hot and heavy. Lucky us, we decided to buy a crappy little store in a pretty little town (Montrose) so we cashed out our houses in Casper….made a killing but the market absolutely crashed a year later. Smart, no, how about just plain lucky. Interest rates were so high in the early eighties that hardware stores were cheap. Simple truth, use limited borrowed funds in an overwhelmingly active investment, work your ass off and the returns can be huge. Passive (sit on your ass) investments are almost never good. Old Warren still goes to work every day and he never invests borrowed money. He has more money than God because he does just the opposite of what the masses do. He just gave more to charities than the all the churches combined…don’t you just love it. That means his kids probably have to buy their own cars….CZ
July 2nd, 2006 at 4:14 pm
Yup… I think dad are on the same page it turns out. Well put. The term is leverage is funny term. Leverage, in the financial world means using debt. Rather than leverage… let it ride. Come up with the seed money and then do nothing with returns but “Let it ride”. Earning returns on returns… the power of compound interest is the greatest force on earth according to both Buffet and Einstein.
July 9th, 2006 at 12:59 am
I got an Investment idea!
Refinance houses where the Family has already committed Bankruptcy, at a reasonable interest rate. Hell there bound to sink again, and then you get the house. Better hope it’s an up year.