The Breakdown

Explaining Southern California's economy

Warren Buffett is counting on 'hormones' to cure the housing market

Warren Buffett, chairman of Berkshire Hathaway, attends the Allen & Company Sun Valley Conference.
Warren Buffett, chairman of Berkshire Hathaway, attends the Allen & Company Sun Valley Conference. Scott Olson/Getty Images

Billionaire investor Warren Buffett released his annual Berkshire Hathaway shareholder letter over the weekend. As Marketplace's Heidi N. Moore reported on Monday, this is a much-anticipated and closely studied document. And as one of her sources pointed out, sometimes it's more interesting to focus on what went wrong in Buffett-land than on what went right — because Buffett provides engaging details on both outcomes.

For this letter, you want to zero in on the housing market, which in early 2011 Buffett figured would begin to recover in a "year or so." Wrong! Or to quote the Great Man himself: "dead wrong." Berkshire Hathaway has several housing-related companies in its portfolio, so Buffett would ultimately like to see the long-expected bounce-back. He's optimistic — because you can't fight human nature! Or more accurately, randy human hormones:

Housing will come back – you can be sure of that....Early in a recession, household formations slow, and in 2009 the decrease was dramatic.

That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. [my emphasis] And while “doubling-up” may be the initial reaction of some during a recession, living within-laws can quickly lose its allure.

At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.) While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own. [my emphasis] I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.

Wise monetary and fiscal policies play an important role in tempering recessions, but these tools don’t create households nor eliminate excess housing units. Fortunately, demographics and our market system will restore the needed balance – probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.

Is Buffett a foolish old patriot? Probably not. The linkage between hormones and household formation, while not exactly defined by any metrics, is impossible to avoid. If you read between the lines, what's he's saying is that people can only delay their true entry to adulthood — through marriage, children, and autonomy — for so long. Economists I've talked with who follow the housing market figure that the pace of household formation will revert to normal levels by the 2015-17 period.

I heard that prediction a year and half ago, however. The rate at which unemployment is falling could mean that the housing-market depression will start to seriously resolve a "year or so" (sorry, Warren) earlier. Perhaps by 2013-14.

Sadly, in California this could take much longer, given that the state was so disproportionately exposed to the housing downturn. So while parts of the country may resume normal, red-blooded, American household formation ahead of schedule, California's...well, let's just call a duck a duck...oversexed couples may not be able to achieve the American Dream of home-sweet-home intimacy any time soon.

Follow Matthew DeBord and the DeBord Report on Twitter.

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