US Homebuilders and Home Depot: Property Paralysis Creates a Divide Between the Privileged and Disadvantaged

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Berkshire Hathaway, led by Warren Buffett, has made significant investments totaling $814 million in three major US housebuilders: DR Horton, Lennar, and NVR. However, this move does not signify a belief that the frozen US property market is thawing. The decline in DIY sales is evidence of this.

The surge in interest and mortgage rates has discouraged homeowners from selling their properties, resulting in a low supply of houses on the market. A healthy market usually has four to six months of inventory, but as of June, the US only had 3.1 months, according to the National Association of Realtors. Existing home sales, which make up the majority of the housing market, were down nearly 20% compared to the previous year.

This lack of movement in the housing market has negatively affected retailers and businesses involved in home improvement and home goods. Home Depot, for example, reported a 2% decrease in same-store sales in its second fiscal quarter. While this was better than expected, it marked the third consecutive quarter of year-on-year decline.

During the pandemic, consumers took on more DIY projects, causing Home Depot to face challenging comparisons. Customers are now cutting back on big-ticket items like furniture and appliances. However, Home Depot’s focus on professional contractors and improvements in inventory and supply chain management bode well for the company’s future, reflected in its stock price being 5% higher this year and trading at a slightly higher price-to-earnings ratio than its historical averages.

The fact that median home prices remain near record highs suggests that there is still plenty of pent-up demand. New home constructions can take advantage of this opportunity. DR Horton and NVR have experienced significant increases in new orders, up 37% and over 25% respectively, year-over-year in their latest quarters.

The shares of the top five homebuilders, including DR Horton, Lennar, PulteGroup, Toll Brothers, and NVR, have all reached new highs this year, rising between 40% and 90% over the past 12 months, possibly in anticipation of lower interest rates as inflation slows down. In this dysfunctional market, Warren Buffett sees an opportunity.