Housing Market Forecast Beyond 2012 From Warren Buffett

By Hao Li | February 28 2012 9:43 AM

Legendary investor Warren Buffett just gave a rosy housing market forecast for beyond 2012 in his annual letter to shareholders.

Data from U.S. Census Bureau, Chart made using Microsoft Excel

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Housing will come back - you can be sure of that, said Buffett.

In the long-term, the housing market forecast is driven by supply and demand.

In the years prior to 2008, the U.S. added more housing units than there were households formed.

From 2002 to 2007, annual housing starts averaged 1.34 million while household formation average 1.05 million.

This excess was fueled by a speculative frenzy that saw people buying properties (as either primary residences or investments) they could not afford.

In 2008, the housing market bubble popped with a violence that shook the entire economy, said Buffett.

Moreover, during recessions, household formation slows; in 2009, the decrease was dramatic.

By 2012, the situation has reversed, said Buffett.

People may postpone hitching up during uncertain times, but eventually hormones take over. And while 'doubling-up may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure, he said.

In 2011, the annual pace of housing starts at 609,000 was considerably less than the household formation of 1.14 million.

Data
Data from U.S. Census Bureau, Chart made using Microsoft Excel

Eventually, this imbalance will soak up the oversupply in the housing market, although how long this process takes could vary widely among various local U.S. housing markets.

Demographics and our market system will restore the needed balance - probably before long...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, said Buffett.

Buffett did not explain what probably before long meant in terms of a specific timeline, however.

He admitted that the last time he made such a specific prediction - when he said last year that a housing recovery will probably begin within a year or so - he turned out to be dead wrong.