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Housing Investments Boosting Warren Buffett's Berkshire Hathaway

August 02, 2012 | About:
Holly LaFon

Holly LaFon

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Berkshire Hathaway Inc. (BRK.A) is benefiting after billionaire Chairman Warren Buffett increased investments tied to the U.S. housing market and sidestepped bets on Europe amid the region’s debt crisis.

Berkshire’s Class A shares rose this week to the highest in 16 months. The Omaha, Nebraska-based company, which is expected to report second-quarter earnings tomorrow, is about 3 percent away from the top closing price since 2008.

Buffett added to holdings of Wells Fargo & Co. (WFC), the largest U.S. home lender, bought real-estate brokers and bid on mortgage assets of bankrupt Residential Capital LLC as he bets on a rebound in housing in the world’s largest economy. Rather than spend his company’s cash pile on European companies after a 2008 trip to the region, he made his largest acquisitions in the U.S., including Fort Worth, Texas-based railroad Burlington Northern Santa Fe.

“I don’t know if he’s lucky, smart or patriotic, but it’s worked out for him,” Cliff Gallant, an analyst at KBW Inc., said in a phone interview. He estimates that Berkshire will post an operating profit of $1,750 a share for the second quarter, a 6.7 percent increase from a year earlier.

The economy in the 17-nation euro area may contract this year as governments institute austerity measures to lower borrowing costs, according to the median estimate of 35 analysts surveyed by Bloomberg. Buffett said last month that Europe’s monetary union may fracture if its leaders can’t rewrite their rules, while U.S. housing was beginning to show signs of a rebound after the worst crash in seven decades.

Housing Improves

“For the last two years, I’ve seen everything except housing moving forward in the economy,” Buffett, 81, told Betty Liu in a July 13 interview on Bloomberg Television. “In the last few months, the rest of the economy actually has flattened out. Housing is picking up.”

The number of available U.S. homes has been declining, a trend Buffett has said was inevitable as new households form. Properties for sale fell to 2.39 million in June from an average supply of 2.93 million in 2011 and 3.22 million in 2010, data from the National Association of Realtors show.

A turn in the housing market will benefit Berkshire’s businesses tied to home building and repair, said Josh Brown, who helps oversee $350 million at Fusion Analytics Investment Partners LLC in New York, including Berkshire shares.

“Buffett has spent the past decade amassing a portfolio of companies that are involved with home remodeling,” he said in a phone interview. “It’s got the right drivers if this housing trend continues.”

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