Buffet Bets on Homebuilders

Good morning,

Buffet bets on homebuilders, industrial property values avoid the broader market correction, and the Fed’s inflation fight shows signs of progress, but the end is not yet in site. Let’s delve into today’s topics.

📈 Market Update

🏡 Buffet Bets on Homebuilders

Berkshire Hathaway has made a major bet on homebuilders, disclosing $814M in investments across D.R Horton, Lennar, and NVR. This move reflects Buffet’s views that builders are well-positioned to capitalize on the ongoing shortage in the housing market. The largest investment was in D.R. Horton, with Berkshire buying $726M of shares to become one of the builder’s top 10 shareholders. The investments come as Buffet has been cautious amid stock market volatility, building a massive $147B cash position.

Homebuilder Stocks Outpace Broader Market:
Homebuilder stocks have easily outpaced the broader S&P 500 this year, up 36% in 2023 while the S&P is up 17%. Top builders like D.R. Horton, Lennar, and NVR have seen shares rise 35-39% this year. Lean housing inventory and still-strong demand are providing tailwinds to builders, however, it hasn't been completely smooth sailing. Supply chain issues and labor shortages have challenged builders trying to maximize production. And rising mortgage rates are now posing headwinds.

Mortgage Rates Hit 20-Year High:
Indeed, the average 30-year fixed mortgage rate rose to 7.16% last week, matching a 20-year high. Higher rates are dampening both home sales and refinancing activity. While limited supply has helped stabilize home prices, higher borrowing costs pinch affordability. And higher rates make it tougher for existing homeowners to sell and trade up.

MetLife Launches $390M SFR Fund:
MIM has launched a $390M SFR fund, attracting strong institutional demand and reflecting a growing appetite for built-for-rent housing. The fund will target fast growing markets with access to schools, jobs, and retail. The fund its MIM’s first closed-end vehicle dedicated to SFR.

🏭️ Industrial Property Values Avoid the Broader Market Correction

CRE values have declined across the board this year, however industrial cap rates have remained remarkably stable. The average cap rate for industrial was 5.4% at the end of June, only up 20 bps since the start of the year. Cap rates for multifamily and office sales rose 60 bps and 120 bps over the same time period.

⤴️ The Takeaway:
The stability in cap rates as interest rates continue to rise reflect the expectations of rent growth and mark-to-market opportunities in industrial. While industrial rent growth is decelerating, it still outpaces other asset classes. This is likely to attract continued capital inflows, suggesting industrial cap rates could remain low as cap rates for other asset classes increase.

💹 Fed's Inflation Fight Shows Signs of Progress, but the End is Not Yet in Site

The consumer price index rose just 0.2% in June and July, down from higher monthly jumps in 2023. Core inflation, excluding food and energy, also slowed. However, shelter costs continue driving inflation up, with rents still rising at nearly 8% annually. Excluding shelters, inflation was just 1% in July, below the Fed's 2% target. Meanwhile, producer prices ticked higher in July, signaling pipeline inflation pressures remain. Strong July retail sales also suggest robust consumer demand that could keep inflation elevated.

The Fed seems to be making progress on inflation but the road ahead still looks bumpy. Fed Chair Jerome Powell will likely want to see consistent declines before declaring an end to rate hikes. For now, the finish line in the inflation fight remains elusive.

✍️ Further Reading

• BlackRock Predicts a Future Economy of Full-Employment Stagnation (GS)

• Summers Says 10-Year Yields Could Average 4.75% in Coming Decade (BBG)

• Brookfield Chases Rivals for Private Equity’s New Money-Spinner (BBG)

• Reuben brothers revealed as buyer on Vornado’s $124M retail portfolio (RD)

• Bridge’s landmark Loop office tower value slashed 74% (RD)

• Envision Enters Cold Storage Sector With $1.5B in Purchasing Power (GS)

• Theme Parks Look for Developments To Extend Recovery (CS)

📊 Chart of The Day