Collection: Warren Buffett - #348 'Real Estate Vs. Stocks'



[Transcript]

AUDIENCE MEMBER 00:00

I’m Lori Gold (PH) from San Francisco, California.


My question is, what are your thoughts about the residential real estate market in the U.S., where it’s headed? And how is California different, if so?


WARREN BUFFETT 00:18

Well, Charlie is our California expert. We’ve managed one time to develop a great piece of property in California. We spent about 20 years or so developing it, Charlie, or —


CHARLIE MUNGER 00:29

Yes. And we got our money back with interest.


WARREN BUFFETT 00:31

Barely.


CHARLIE MUNGER 00:32

Barely, yeah. (Laughter)


WARREN BUFFETT 00:34

We finished it at just the wrong time. We — the land value that we nurtured — that was a terrific piece of land. Charlie lives there. And I don’t think it’s an exaggeration to say we spent 20 years —


CHARLIE MUNGER 00:50

No.


WARREN BUFFETT 00:51

— working on developing the land. And the land value, which, in effect, we cashed out for, what, 5 or $6 million, now would have an — the implicit land value — would be what?


CHARLIE MUNGER 01:01

Maybe a hundred million dollars.


WARREN BUFFETT 01:03

Yeah. But we finished it at the wrong time.


So, you know, it’s a wonderful — the climate is wonderful. Everything is wonderful about this property.


It’s just that, from time to time, even in great localities — you’ve seen it happen in New York a couple of times, you know, in the last 30 years, where the swing in property values has just been huge.


And what we see in our residential brokerage business — and we’re in, I don’t know how many different states — is we see a slowdown every place.


Now, we see it most dramatically in some of the — what have been the hottest markets.


In the markets where you’re going to — in my view — you’re likely to see the greatest fall-off and where you’ve had the biggest bubble are the ones — they tend to be the high-end market, and they tend to be ones where people have bought for investment or speculation, rather than use.


People will pay $300,000 for a house and mortgage it for 270,000, and if the value goes to 250, if they have a job and everything, they won’t move out.


I mean, you don’t lose a lot of money even though the market value on a given day is less than the loan value when families stay together and employment is present and all that.


But when you have investment-type holdings, speculation-type holdings, when you, in effect, have had the day traders, you know, of the Internet move into the day trading of condos, then you — then you get — then you get a market that can move in a big way.


First it sort of stops, and then it kind of reopens. Real estate is different than stocks. If you own a hundred shares of General Motors, it’s going to trade on Monday and that’s what it’s worth and you can’t kid yourself about it.


But if you own real estate, you know, there’s a great tendency to think about the one that sold down the street a few months ago. And there’s a great tendency to think, you know, you only need one buyer who hasn’t gotten the word that things have slowed down and you’ll make your sale.


I can tell you that in Dade and Broward County, for example, in Florida, where the average condo is about 500,000, if you go back to December of 2004, there were less than 9,000 condos listed for sale, and I think 2,900 of them sold in the month so you were — turnover one every three months, less than that.


Now, the listings are up to 30,000, and the sales are down to under 2,000 a month. Well, 30,000 is $15 billion worth of properties. And you are — very likely, you can get real discontinuities in a market like that, where all of a sudden people realize that the whole supply-demand situation has changed.


So I think we’ve had a bubble, to some degree, and it’s very hard to measure that degree until after it’s all over.


But I would be surprised if there aren’t some significant downward adjustments from the peak, particularly in the higher-end properties.


CHARLIE MUNGER 04:25

Yeah. The man is right that the bubbles came in Manhattan and in certain places in California. In Omaha, housing prices are quite reasonable. So it’s — the country is not all the same, at all.


WARREN BUFFETT 04:46

We just got an estimate of the attendance at 24,000, which was about what it looked like from the tickets we had gotten. I thank you all for coming, on that note. (Applause)


Even better, the Furniture Mart, which had sales in 1997 of 5-and-a-fraction million, 2003 sales of 17 million, sales last year of 27 million, is up so far 2 1/2 million, with the best yet to come.


So we’re — I would say we’re likely to do over 30 million at the Furniture Mart. And that, incidentally, is about equal to a normal monthly volume for the store. So you’re doing your part. Thank you.


Number 2? But you can do more. (Laughter)


(Source: https://buffett.cnbc.com/2006-berkshire-hathaway-annual-meeting/)

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[YAPSS Takeaway]

Real estate is different than stocks.

"If you own a hundred shares of General Motors, it’s going to trade on Monday and that’s what it’s worth and you can’t kid yourself about it.


But if you own real estate, you know, there’s a great tendency to think about the one that sold down the street a few months ago. And there’s a great tendency to think, you know, you only need one buyer who hasn’t gotten the word that things have slowed down and you’ll make your sale." ~Warren Buffett

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