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Buffett Says 'No-Brainer' to Get a Mortgage to Short Rates

Wednesday, 08 Oct 2014 08:11 AM

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy.

“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”

Housing starts slumped in August from the highest level in almost seven years to a 956,000 annualized rate, Commerce Department data show. Slow wage growth and tighter lending standards have kept some would-be borrowers from buying a home.

Buffett, 84, whose Omaha, Nebraska-based company has units that build houses and make carpet, paint and bricks, reiterated today that he expects home building to pick up as the market rebounds from the deepest slump in more than seven decades.

“Household formation falls off dramatically in a recession, at least initially,” he said. “But that doesn’t last long. Hormones kick in and in-laws get tiresome, too.”

Vacancy rates for U.S. apartments have been at 5 percent or less since the first quarter of 2012, according to Reis Inc., a property research firm.

Car Dealerships

Other parts of the economy have come back faster than housing. Buffett said today that he was surprised by the rate of increase in auto sales, in particular, and that he would have anticipated housing to be better given that carmakers are on pace to sell almost 17 million vehicles in the U.S. this year.

Buffett agreed last week to buy Van Tuyl Group, a collection of 78 car dealerships, in a bet that the industry will consolidate. The company will be renamed Berkshire Hathaway Automotive.

Buffett also emphasized the appeal of 30-year fixed-rate mortgages, which can be refinanced if rates fall or remain outstanding if rates rise. That provides a way to bet against higher borrowing costs, with a hedge against a decline.

Shorting interest rates is a bet they will rise. The average rate on at typical 30-year, fixed-rate mortgage was 4.19 percent last week, Freddie Mac surveys show. That compares with the 6.14 percent average during the past two decades.

“It’s an incredibly attractive instrument,” Buffett said. “It’s a 30-minute instrument if you’ve been wrong on interest rates and it’s a 30-year instrument if you’ve been right on interest rates.”

Berkshire is the largest shareholder in Wells Fargo & Co., the biggest U.S. home lender.

--With assistance from Jody Shenn in New York and Hui-yong Yu in Seattle.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net Dan Reichl

© Copyright 2017 Bloomberg News. All rights reserved.

   
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Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rates
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Wednesday, 08 Oct 2014 08:11 AM
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