Stocks in the United States are trading near all-time highs as investors rush to take advantage of the artificial intelligence revolution. The AI revolution offers transformative technology that promises to increase the country’s long-term growth rate through sustained productivity improvements. But these aren’t the only stocks making news.
Berkshire Hathaway announced a few days ago that it was buying, of all things, a homebuilder, Taylor Morrison. Berkshire Hathaway is controlled by perhaps the world’s greatest investor, Warren Buffett, who started with very little and became one of the wealthiest people on the planet. Buffett is famous for a simple investment philosophy: buy quality assets at reasonable prices and hold them for a very long time, decades rather than days. Berkshire Hathaway’s purchase of Taylor Morrison is a perfect example of that approach.
Buying a homebuilder is a bet on long-term structural demand for housing. Every American needs a place to live, and the country suffers from a chronic housing shortage. Berkshire Hathaway’s management understands that although housing stocks may be out of favor today, they will eventually return to favor when the current obsession with technology stocks fades. Buffett understands that over long periods of time, disciplined value investing often delivers superior returns.
The broader market frequently views housing as a volatile, interest rate-sensitive sector. Berkshire, however, sees housing as an essential asset class protected by substantial barriers to entry. Because of extensive local regulatory hurdles across much of the country, successful homebuilders that understand how to navigate local markets possess a durable competitive advantage.
Berkshire’s aggressive positioning in housing rests on several core pillars. Foremost among them is Buffett’s famous principle of buying when others are fearful. Mortgage rates remain elevated, and new home construction is experiencing a cyclical slowdown. Many stand-alone builders are facing margin pressure. Berkshire, however, views the current environment as a classic buying opportunity. With a cash pile approaching $400 billion, the company can comfortably absorb short-term cyclical headwinds while positioning itself to benefit from the enormous pent-up demand for housing. Estimates suggest there is a shortage of around 10 million housing units nationwide, with many potential buyers waiting for affordability conditions to improve.
Following the acquisition, Berkshire will become the country’s fourth-largest homebuilder. The company already owns Clayton Properties, the nation’s twelfth-largest builder. Massive scale provides Berkshire with significant advantages, including stronger bargaining power when purchasing land and raw materials. The combined company will also have the financial strength to offer attractive mortgage rates and buyer incentives that smaller independent builders cannot match. In addition, Berkshire plans to integrate its housing operations into a streamlined platform capable of achieving economies of scale that will strengthen its long-term competitive position.
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Despite paying a 24% premium over Taylor Morrison’s market price, the acquisition closely mirrors Buffett’s historic investment discipline. Analysts estimate the purchase price is roughly 0.9 times the company’s tangible book value. In plain English, Berkshire acquired a highly profitable national homebuilder for less than the estimated value of its hard assets minus liabilities while also paying a low single-digit price to earnings multiple, a substantial discount to the broader market.
Ultimately, Berkshire likes housing because people will always need a place to live, the nation continues to face a structural undersupply of single-family homes, and Berkshire’s virtually unlimited investment horizon is uniquely suited to outlast any temporary downturn in the real estate market.
James Rogan is a former U.S. diplomat who later worked in law and finance for over 30 years. He writes a daily email note on markets, economics, politics, and social issues. He can be reached at [email protected].