Spring Has Sprung

The origin of investing’s golden rule, “Buy low and sell high,” is unknown; although it is frequently mentioned in the same breath as one of its most successful practitioners, Warren Buffett.   For sure, Buffett coined the other oft-quoted mantra of levelheaded investing, “Be fearful when others are greedy and greedy when others are fearful,” which is an apt description of the upbeat mood now guiding investor sentiment in the aftermath of one of the most fearful periods in American financial history.

With his vast fortune largely the by-product of a lifetime of well-timed investments, when Buffett issues a “buy” recommendation, people sit up and take notice.   A few days ago, he did essentially that when quizzed by an interviewer as to which is the better option for today’s youthful investor, stocks or a new home.

The question—posed during a live interview on CNBC’s financial news program Squawk Box—went like this:  If you are a young, individual investor and have a choice between buying your first home or investing in stocks, which is the better bet?”

Without hesitation, the man whose longstanding ability to identify great investments before anyone else gets wind of them has earned him the nickname The Oracle of Omaha, replied:  “If I knew where I was going to want to live for the next five or ten years, I would buy a home and finance it with a 30-year mortgage.  It’s a terrific deal.”

To re-emphasize his point, Buffett stated that he would gladly “load up with a couple hundred thousand single-family homes” at today’s remarkably low mortgage interest rates—if only he had a practical way to manage that many properties.  “Housing is a very attractive asset class right now,” he said.

Buffett then tossed-off an intriguing aside.  “It’s a way, in effect, to short the dollar,” he advised.

Here’s what he meant by “shorting the dollar.”  When you purchase a home using today’s combination of low prices and historically low interest rates, you are essentially buying a very desirable asset at a rock-bottom price—with the lender footing the bill.  If the interest rate goes lower still, you can refinance and end up owing even less.  If it goes up—which will invariably happen as the economy re-ignites and inflation heats up again—the lender is “stuck” servicing the low-rate loan for up to thirty years.  Meanwhile, in addition to the normal appreciation that typically occurs over time, the value of your asset will be rising as the value of the dollar declines.
“If I were an investor who is also handy, which I’m not, I would buy several homes, fix them up and rent them out,” Buffett hastened to add.   “With a 30-year mortgage, it’s a leveraged way of owning a very cheap asset now.  That’s about as attractive an investment as you can make.”    Rental prices throughout Southwest Florida went up 5% in 2011 and are expected to do the same this year.

Timing of course is everything in Buffett’s world.  Three years ago, he advised that the time was absolutely right to buy stocks again.  Prices had tumbled, corporations were starved for capital; and the average investor was frozen in fear.  Back then he cautioned against waiting too long with the metaphor:  “If you wait until you see the first robin, spring will be over.”

As usual, The Oracle of Omaha was right on the money. Since making that prediction during the depths of the Great Recession, stock prices have nearly doubled.

Buffett now uses the same metaphor to describe present-day buying opportunities in the housing market.  Locally, with the bottom at hand, buyers have thoroughly picked over the inventory of available properties in our market, driving it to its lowest level in six years.  Still, Buffett sounded a note of optimism for buyers hoping to catch the tail-end of our market’s turnaround:  “Spring may be over,’ he said.  “But we’re not in the dead of winter yet either.”

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