In his annual report just released recently, Warren Buffett states that somewhere in 2011 the residential real estate crunch should be over, as demand starts to mirror the supply out there.
While that may seem like good news in general, part of that news is prices are still going to be far below where they were at "bubble" levels; part of the reason the market collapsed in the first place (high prices for no reason).
Once that begins to happen, we will have a buyers and not a sellers market, as people will have to unload their homes at lower prices if they want to sell them. It's uncertain how deeply this will negatively affect homeowners or lenders at this time, although selling the homes to legitimate buyers should help lenders who will have sellers with more equity and better credit ratings this time around.
New home construction was down to the lowest level in 50 years in 2009 as the amount of money owed on homes was less than homeowners held on their mortgages, forcing them to leave their homes to foreclosure or pay the difference if they wanted to sell them. Most chose foreclosure, which was behind the cause of slow introduction of new homes, as the market was flooded with the old homes.
Buffett states in the annual Berkshire Hathaway (BRK-A) report that there were about 2 million new homes being built a year at that time, while demand was around 1.2 million. Easy money and the gold rush mentality of builders was a major part of why they neglected market conditions and kept building when there was no demand for it.
Even though Buffett looks for a housing recovery in general in 2011, he isn't so positive about it taking hold in all parts of the country, as high-end homes and areas where the building was particularly heavy, it could take much longer to work through in his view.
Some Berkshire Hathaway holdings are strongly positioned to participate in the housing recovery whenever it comes, and as usual, the wily Warren Buffett will be ready to pounce when it does.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
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